Commercial Law in UK

Commercial law

Philip Rawlings

This subject guide was prepared for the University of London International Programmes by:

Philip Rawlings, Professor of Law, Faculty of Laws, University College London.

This is one of a series of subject guides published by the University. We regret that owing to pressure of work the authors are unable to enter into any correspondence relating to, or arising from, the guide. If you have any comments on this subject guide, favourable or unfavourable, please use the form at the back of this guide.

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Commercial law Contents page i

Contents

1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

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

1.2 Learning outcomes for Commercial law . . . . . . . . . . . . . . . . . . . . 4

1.3 Approaching your study . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

1.4 Study skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

1.5 The examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Reflect and review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

2 Agency 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

2.1 What is an agency? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

2.2 Types of agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

2.3 Creation of agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

2.4 The actual authority of the agent . . . . . . . . . . . . . . . . . . . . . . .22

2.5 Apparent authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

2.6 Usual authority: Watteau v Fenwick . . . . . . . . . . . . . . . . . . . . . .27

2.7 Ratification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28

2.8 Agency of necessity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31

2.9 Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32


3 Agency 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36

3.1 Relationship with third party: disclosed agency . . . . . . . . . . . . . . . .37

3.2 Relationship with third party: undisclosed principal . . . . . . . . . . . . . .41

3.3 Relationship between principal and agent . . . . . . . . . . . . . . . . . .45


4 Sale of goods: contract, property and risk . . . . . . . . . . . . . . . . 51

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52

4.1 The Sale of Goods Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53

4.2 The scope of the Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55

4.3 What is a contract of sale of goods? . . . . . . . . . . . . . . . . . . . . . .55

4.4 The sale contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58

4.5 ‘Transfers or agrees to transfer the property’ . . . . . . . . . . . . . . . . .60

4.6 Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69

4.7 Perishing of goods and frustration of contract . . . . . . . . . . . . . . . . .70

4.8 Transfer of title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72


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5 Sale of goods: performance and implied terms . . . . . . . . . . . . . 79

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80

5.1 Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81

5.2 Delivery and payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .82

5.3 Implied terms as to title and quiet possession: s.12 . . . . . . . . . . . . . .85

5.4 Implied term as to description: s.13 . . . . . . . . . . . . . . . . . . . . . .88

5.5 Implied terms as to quality: ss.14-15. . . . . . . . . . . . . . . . . . . . . .92

5.6 Implied term as to satisfactory quality: s.14(2). . . . . . . . . . . . . . . . .93

5.7 Implied term as to fitness for particular purpose: s.14(3) . . . . . . . . . . .99

5.8 Implied terms in sales by sample: s.15 . . . . . . . . . . . . . . . . . . . . 102

5.9 Limitation or exclusion of liability . . . . . . . . . . . . . . . . . . . . . . 103

Reflect and review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

6 Sale of goods: acceptance, remedies and retention of title . . . . . . . 107

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

6.1 Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

6.2 Remedies of the buyer. . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

6.3 Remedies of the seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

6.4 Retention of title by the seller . . . . . . . . . . . . . . . . . . . . . . . . 119


7 International sale contracts . . . . . . . . . . . . . . . . . . . . . . . 125

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

7.1 Documents and contracts . . . . . . . . . . . . . . . . . . . . . . . . . . 127

7.2 fob contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

7.3 cif contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

7.4 Ex-works, ex-ship and fas contracts . . . . . . . . . . . . . . . . . . . . . 136

7.5 Electronic ‘documentation’ . . . . . . . . . . . . . . . . . . . . . . . . . 137

7.6 An international law of international sales? . . . . . . . . . . . . . . . . . 137


8 Payment: documentary credits . . . . . . . . . . . . . . . . . . . . . 141

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

8.1 Documentary bill (bill of exchange) . . . . . . . . . . . . . . . . . . . . . 143

8.2 Documentary credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

8.3 Strict compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

8.4 Autonomy of the credit . . . . . . . . . . . . . . . . . . . . . . . . . . . 152

8.5 Contractual rights and obligations. . . . . . . . . . . . . . . . . . . . . . 155


Feedback to activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

Chapter 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161

Chapter 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

Chapter 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

Chapter 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

Chapter 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

Chapter 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

Chapter 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

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

1.2 Learning outcomes for Commercial law . . . . . . . . . . . . . . . . . . 4

1.3 Approaching your study . . . . . . . . . . . . . . . . . . . . . . . . . . 5

1.4 Study skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

1.5 The examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

1 Introduction

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Introduction

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

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

You should use a notebook or ring binder as you study this course. This should be used for recording answers to activities and making working notes. It is not the same as your Skills portfolio, which should contain the evidence that you are acquiring learning and legal skills. See 1.3.3 for more details.

Learning outcomesBy the end of this chapter and the relevant readings, you should be able to:

approach the study of commercial law in a systematic way

understand how this subject guide is organised and the various elements of which it is comprised

understand how to develop your learning skills

understand how to approach the examination.

Commercial law Chapter 1 Introduction page 3

1.1 What is commercial law?

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

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

This course is, therefore, organised around the contract of sale. In this it reflects the view of one leading writer, Professor Sir Roy Goode, who remarked that commercial law comprises ‘that branch of law which is concerned with rights and duties arising from the supply of goods and services in the way of trade’ (Goode, p.8 – see 1.3.1 below). The syllabus comprises:

the law of agency

the law of sale of goods

the law of international sale of goods

the law relating to payment by documentary credits.†

At this stage, you might have reached the view that commercial law is not a separate subject but a number of distinct areas of law that have been gathered together. Indeed, you might, with Professor Goode (p.1347), ask, ‘Does commercial law exist?’ Although the answer to that question must be evident for those of his readers who have read through the preceding 1346 pages, it is a question that you should think about while you are studying.

The roots of modern commercial law can be traced to the lex mercatoria or ‘law merchant’ (see Sealy and Hooley, pp.14-19 – see 1.3.1 below). This was, broadly, the law applied to mercantile transactions or by merchants in their own courts, and to some extent these rules applied across national borders. Many of the rules developed in these courts were incorporated into the common law, particularly by judges such as Sir John Holt and Lord Mansfield in the seventeenth and eighteenth centuries. In the late nineteenth century there were attempts to follow the practice of civil law jurisdictions by codifying the principles generated by cases – the Bills of Exchange Act 1882, the Sale of Goods Act 1893 (now 1979), the Marine Insurance Act 1906 and the Partnership Act 1890, all of which either remain in force or continue to influence current law. Since these statutes arose out of the decisions of the courts (even if they did not always reproduce those decisions), they tended to reflect the fact that the bulk of those decisions concerned disputes between merchants. This meant that, broadly speaking, the legislation did not seek to interfere with the freedom of merchants to make contracts and to organise their business as they saw fit.

Yet this view of contract law as not intervening can be taken too far. The Sale of Goods Act 1893 imposed various obligations on sellers and buyers, including implied terms as to description and quality (see Chapter 5). Moreover, even if non-intervention tended to dominate the development of the law relating to contracts of sale, there had always been an element of consumer protection through the criminal law, which had imposed penalties for false measures and the adulteration of food and drink. By the second half of the twentieth century there was pressure to improve protection for consumers, not just through the criminal law but also through the strengthening of consumer rights. The way in which commercial law had developed through litigation between merchants had meant little consideration was given to the needs of private consumers. As a result of the growth of the consumer movement legislation began to emerge to regulate various aspects of the relationship between consumers and merchants. This included:

† For a set of learning outcomes relating to the syllabus, see 1.2 below.


the contract itself (e.g. the Unfair Contract Terms Act 1977, Unfair Terms in Consumer Contracts Regulations 1999)

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

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

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

Study pack reading ‘Rule, practice, and pragmatism in transnational commercial law’ by Roy Goode.

The concerns and objectives of the law relating to transactions between merchants (commercial law) differed from those relating to transactions between merchants and consumers (consumer law). Unfortunately, this distinction between commercial law and consumer law is not always clear. The tendency has been to combine in a single statute the different rights and obligations relating to commercial (merchant-merchant) transactions and to consumer (merchant-consumer) transactions. So, for instance, these different types of transactions are mixed together in the Sale of Goods Act 1979 (see Chapters 4-6). There has been a good deal of debate over whether or not it might be preferable to create separate codes of law for commercial sales and for consumer sales (Bridge, M. ‘What Is To Be Done about Sale of Goods?’ (2003) 119 LQR 173). However, it is important to state at the outset that this subject guide is concerned only with commercial sales and, while many of the principles do also apply to consumer sales, these two types of transactions also differ in important respects (see, for example, the additional rights enjoyed by consumers under ss.48A-48F Sale of Goods Act 1979: Sealy and Hooley, p.486).

The other problem is that the incorporation of the lex mercatoria into the common law meant that it lost its international flavour. This has prompted a call for the harmonisation of rules relating to international sales. Within the European Union some strides towards such harmonisation have been made, although much of the focus has been on consumer legislation. In addition, various international treaties and conventions have been drawn up which seek to bring some unity to international commercial law, either through adoption by states or by incorporation into contracts by parties (e.g. the Uniform Customs and Practice for Documentary Credits, see Chapter 8). It does not take much thought to recognise the difficulty of drafting international agreements on such issues so that they can apply in jurisdictions operating under quite different systems of law, or to understand the problems domestic courts around the world may have in construing and applying such agreements in such a way as to maintain consistency with courts in other countries. More successful, perhaps, are the various standard-form contracts issued by international trade organisations and adopted by merchants (see Chapter 7).

For further discussion of all of these issues, read Sealy and Hooley, pp.3-54. See also Bradgate, pp.3-20. (See section 1.3.1 below.)

1.2 Learning outcomes for Commercial law

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

a Agency (Chapters 2-3) define the term ‘agent’

explain how an agency is created

discuss the scope of the agent’s authority


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

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

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

b Sale of goods (Chapters 4-6) discuss the approach taken to interpretation of the Sale of Goods Act 1979

analyse the components of the definition of a contract of sale

explain the circumstances in which property in goods is passed

identify how risk is passed

understand the nemo dat rule

discuss and illustrate the exceptions to the nemo dat rule

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

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

discuss the relationship between the different implied terms

outline the limits imposed on attempts by the seller to exclude or restrict liability for breach of the implied terms

understand and discuss the rules on acceptance

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

explain the use of retention of title clauses and the limits of such clauses.

c International sale contracts (Chapter 7) identify the key characteristics of cif and fob contracts

analyse the distinctions between cif and fob contracts

discuss the duties of the seller and buyer under cif and fob contracts

explain the remedies available to the seller and buyer under cif and fob contracts

understand the general issues involved in the use of electronic documentation and the effect of international agreements on the terms of international sale contracts.

d Documentary credits (Chapter 8) define and identify the characteristic features of a documentary credit

explain the significance of the Uniform Customs and Practice for Documentary Credits (UCP)

identify the different types of documentary credit

explain the steps involved in the opening of a credit

analyse the various contractual relationships

discuss the strict compliance and autonomy of the credit rules

explain the rights and obligations of the parties.

1.3 Approaching your study

This guide is designed to direct you through your study of commercial law. You should work through each chapter in turn. The guide has been written to enable you to build up your knowledge. Each chapter is written on the assumption that you have read and understood previous chapters. You should not, therefore, dip into the guide: your aim


is to understand the whole subject. This requires the ability to stand back and see the structure of commercial law. Indeed, you will find it much easier to understand and remember cases and statutes if you can see them as part of this larger structure rather than treating them as unconnected rules. Commercial law has its eccentricities but, overall, it works because it has been built up in response to the needs and practices of business people.

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

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

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

Primary textbook

Sealy, L.S. and R.J.A. Hooley Commercial law: text, cases and materials. (London: LexisNexis Butterworths, 2009) fourth edition [ISBN 9780199299034].

This book will be referred to throughout the guide as ‘Sealy and Hooley’. It resembles a portable library in that it contains extracts of leading cases, legislation, articles and editorial commentary. It also contains useful questions at the end of each section, which you should attempt to answer in order to test your understanding of passages that you have studied.

Much of your study will be devoted to the readings from this book, although at various points you will be directed to other materials. You should also try to read as many of the leading cases in their original form as possible. Remember that, while this excellent book has been compiled by two of the leading commercial lawyers, it is only their particular view of what is important.

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

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

Study pack

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

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


Other texts to consult

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

Bradgate, R. Commercial law. (London: LexisNexis Butterworths, 2000) third edition [ISBN 9780406916039]. Please note: a new edition of this book is due to be published in 2011.

McKendrick, E. Goode on Commercial law. (London: Penguin Books, 2010) fourth edition [ISBN 9780141030227].

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

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

Statute books

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

Legal journals

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

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

Cases and legislation http://www.bailii.org/

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

Recent UK legislation is also available through a government site:

http://www.legislation.gov.uk/

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

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

At the end of each chapter, this guide asks you to reflect on and review your understanding of the issues contained in that chapter. You are strongly advised to carry out this review and to go over any points which you still feel unsure about before proceeding to the next chapter.


We hope that using the ‘Reflect and review’ sections in the guide, and your portfolio or learning journal, will help you become used to reflecting on your study. We believe that reflection is essential for authentic self-understanding and learning processes that last.

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

1.4 Study skills

Successful law students are able to demonstrate a broad range of skills. You will already have developed many of these during your study so far, and resources such as the laws VLE, the Studying law textbook and your portfolio/learning journal will also help you build on these (see 1.3.3 above). In this section, we draw attention to some key points to bear in mind as you work through this course.

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

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

to discern themes and patterns in large amounts of disparate information

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

to explain the different sides of a controversial issue

to make, apply and criticise precise distinctions

to rapidly separate the relevant from the irrelevant

to think logically

to think critically

to research

to plan

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

to concentrate, working with speed and stamina

to work independently with initiative and self-confidence

to work co-operatively, to lead and to support with sensitivity.

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

to learn from experience

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

to use the above skills to evaluate your knowledge

to use those skills to analyse and solve problems.

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

1.4.2 The need for a critical approachActivity 2.7 asks:

Is the decision in Watteau v Fenwick wrong?

In English law, judges’ decisions are always open to critical assessment. To become an LLB graduate, you need to demonstrate critical qualities.


Criticism is not about pointing out minor errors in a person’s position – such as a spelling mistake and inserting the wrong year for a case. It is about demonstrating a unique personal position on something. It is also about demonstrating your ability to use your knowledge and understanding of law to make meaningfully comments. As Anne Thompson says in her book Critical reasoning: a practical introduction (London: Routledge, 1996, ISBN 0415132045):

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

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

1.4.3 ‘Giving your own views’ Activity 4.1 asks:

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

In responding to this and similar activities and examination questions, we expect you to make your own analysis and give your opinion as to what the problems are in Lord Diplock’s approach.

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

If you are not sure what your views are on a topic, note down the main issues and see how they relate to each other. Ask other students what they think. Discuss – and argue – your views with them. Students who simply list everything they know about a subject, or repeat ‘model answers’, will not receive good marks in the examinations.

Higher education is about thinking as well as learning. You do not have to accept the standard views and explanations of any subject. For example, although the LLB degree explains and supports the common law, you may take the view that civil law systems are superior to common law systems. You may decide that there are few, or no problems in Lord Diplock’s approach. This is perfectly acceptable, if you can support this view with reasoned arguments.

No-one will object to that – provided that you can produce logical arguments and evidence for your views. The only requirement is that you must be able to argue your position with supportive evidence and reasons.

1.5 The examination

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

1.5.1 PreparationYou need to start your examination preparation at the beginning of the course and not leave it until the period just before the examination starts. As you proceed through your studies you should try to summarise the key points in each section. The sample examination questions in this guide will give you some indication as to how to approach different types of examination questions, but there is no substitute for


practice. You should, therefore, practice old LLB examination questions (available on the VLE). Put yourself under examination conditions. Give yourself only 45 minutes to answer each question, including reading the question and planning time. Do this throughout your course to familiarise yourself with writing examination answers.

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

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

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

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

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

1.5.3 Answering the questionIt cannot be emphasised enough that you must answer the question that has been asked and not one that you hoped would have been asked. You may get no marks at all or seriously endanger your ability to pass a question if you do not observe this simple rule. You must ask yourself, ‘What is this question seeking to discover?’ It will be rare for you to be asked simply to describe an area of law or provide a list of rules. As a lawyer you are being tested on your ability to analyse and to argue. Lawyers do not provide unsubstantiated opinion, they reason from authority. They acknowledge the weaknesses and strengths in the arguments they present. They are also looking to see how the law might develop.


In general you will encounter two types of questions, the problem and the essay. The sample examination questions at the end of each chapter in this guide provide illustrations of both types and in the feedback to those questions you will find guidance about the approach you should take in answering them.

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

While problem questions lead you to the areas of law that the examiner wishes you to discuss, essay questions provide more scope for discussion. You must, therefore, be careful to focus on the question being asked. You must identify what it is that the essay question is seeking. Often you are invited to discuss an assertion about the state of the law. Do not simply say to yourself, ‘Oh good! This is a question on the nemo dat rule and its exceptions’, and then set about a description of the rule and the exceptions. It is unlikely that this is what the question is asking you to do. (See Chapter 4 for the nemo dat rule and a sample examination question).

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

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


Reflect and review

Look through the points listed below:

Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the principles outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter very difficult and need to go over them again before I move on.

Tick a box for each topic.

Ready to move on

Need to revise first

Need to study again

I can approach the study of commercial law in a systematic way.

I understand how this subject guide is organised and the various elements of which it is comprised.

I understand how to develop my learning skills.

I understand how to approach the examination.

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

Must revise

Revision done

1.1 Commercial law

1.2 Learning outcomes for Commercial law

1.3 Approaching your study

1.4 Study skills

1.5 The examination

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

2.1 What is an agency?. . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

2.2 Types of agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

2.3 Creation of agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

2.4 The actual authority of the agent . . . . . . . . . . . . . . . . . . . . .22

2.5 Apparent authority . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

2.6 Usual authority: Watteau v Fenwick . . . . . . . . . . . . . . . . . . . . .27

2.7 Ratification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28

2.8 Agency of necessity . . . . . . . . . . . . . . . . . . . . . . . . . . . .31

2.9 Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32


2 Agency 1


Introduction

The law of contract seems to present an obstruction to the operation of companies in the shape of the doctrine of privity: the rule that a contract cannot confer rights or burdens on someone who is not a party. The difficulty for companies is that they can only act through people – it is not actually the company that negotiates and agrees to buy and sell goods, it is someone purporting to act on its behalf (i.e. its agent). The law of agency thus enables a company to enter into contracts. The agents, who actually negotiated these contracts, stand in for the companies they represent and, since they act in that capacity, the agents acquire no personal liability (unless they separately choose to do so).

Since the negotiations carried out by the agent on behalf of the company will affect the company’s legal rights and obligations, the company must be able to place complete confidence in the agent. This has led the law of agency to make the agent– in most cases – a fiduciary. There are also issues relating to the protection of the third party with whom the agent has dealt, the protection of the agent against any liability incurred on behalf of the principal, and the rights an agent may have against the principal.

Since this course is focused on the sale of goods, this part of the subject guide looks at those aspects of the law of agency that enable such transactions to occur. The focus will be on principal-third party and third party-agent relations. There will only be a very brief consideration of the rights and duties owed between the agent and the principal. Chapter 2 deals with the creation of an agency and the scope of the agent’s authority; Chapter 3 discusses the rights of the various parties.

The main reading is Sealy and Hooley, but you might also consult Bradgate, pp.125-75.

Learning outcomesBy the end of this chapter and the relevant readings you should be able to:

define the term ‘agent’

explain how an agency is created

discuss the scope of the agent’s authority.

Commercial law Chapter 2 Agency 1 page 15

2.1 What is an agency?

Essential reading Sealy and Hooley, pp.95-103.

2.1.1 IntroductionLord Alverstone CJ once defined an agent as ‘any person who happens to act on behalf of another’ (The Queen v Kane [1901] 1 QB 472). While this gives a sense of what an agent does, as a statement of the meaning given to the term ‘agent’ by the law of agency it is far too broad and imprecise: ‘Any concise definition of the concept of agency must be treated with care. Striving for brevity, the definition is likely to be flawed by errors and omissions which may make it misleading.’ (Sealy and Hooley, p.95.)

If P (the principal) instructs A (the agent) to act in the purchase or sale of goods from or to T (the third party seller), the contract of sale that arises is enforceable between P and T. In general, A has no liability to either P or T on that contract:

where a person contracts as agent for a principal the contract is the contract of the principal, and not that of the agent; and, prima facie, at common law the only person who may sue is the principal, and the only person who can be sued is the principal. (Montgomerie v United Kingdom Mutual Steamship Association [1891] 1 QB 370, Wright J(Sealy and Hooley, pp.149-50).)

There are three parties, P, A and T, and three relationships:

the relationship between P and A

the relationship between A and T

the relationship between P and T

P

A T

The picture may, however, be more complex. It may be difficult to determine for whom A is acting – A’s function in bringing together the buyer and the seller can make it hard to decide which party appointed A. A may assume personal liability to T, although this is unusual (e.g. confirming houses, discussed in 2.2.3 below). A may be a company and so itself act through an agent in its dealing with T, and both P and T may act with A through agents (e.g. P’s employee appoints A to conclude the deal with T, who also deals with A through its own agent). One party may be simultaneously agent and principal. In Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676 (Sealy and Hooley, pp.452-56), by a contract of sale on credit, S (seller) reserved title in the goods (in essence, S retained ownership of the goods) and required B (buyer) to account to S for the proceeds of any resale of those goods. This meant that on resale B was an agent for S and under an obligation to account for the resale proceeds, but B was also a principal in relation to the contract of sale to the new buyer (on reservation of title see Chapter 6 of this subject guide). It is important to recognise that the appointment of an agent does not preclude the principal from acting (although as a company it cannot act other than through an agent) or from appointing another agent (a shop may appoint many sales assistants), unless the agency agreement stipulates to the contrary.

An agent who acts outside the authority granted by the principal will be in breach of the contract (if there was one) by which the agent was appointed (see 2.5 below). However, in spite of this, the principal may be bound to the third party because the authority with which the agent has been clothed by the principal determines the relationship between the principal and the third party. That is, the principal may be liable to the third party if the principal represented that the agent was acting within their authority (apparent authority). This is based on estoppel: having represented to the third party that the agent has the necessary authority, the principal cannot deny this representation. So the question of whether or not the principal is bound to a third party does not depend on the actual authority granted by the principal to the agent; it depends on the apparent authority of the agent (also known as the ostensible authority of the agent). If the third party knows the limits of the agent’s actual


authority, there is no difficulty and the apparent authority will be the same as the actual authority of the agent. However, usually the third party will not know the terms of appointment of the agent and must rely on the apparent authority.

Where, on the other hand, someone represents to the third party that they have the authority to act as an agent for another person, there is neither actual authority (the ‘agent’ has not been appointed by the ‘principal’) nor apparent authority (the ‘principal’ has not represented to the third party that the ‘agent’ has authority). In this situation the ‘principal’ is not bound and the third party is left only with an action against the ‘agent’ for breach of warranty (that is, breach of the promise by the ‘agent’ of authority to act for the ‘principal’). However, in this situation, the principal may decide to adopt the transaction – in other words, to ratify the action of the ‘agent’ – and by doing so establish a contractual relationship between the principal and the third party.

We will revisit all of these issues in this chapter.

2.1.2 TheoriesThere are three main theories that seek to define and explain agency: power-liability theory, consent theory and qualified consent theory.

Power-liability theory

The power-liability theory says that an agency exists when a person (the agent) acquires the power to alter the principal’s legal relations with a third party so that only the principal (and not the agent) can sue or be sued by that third party.

The problem with this definition is that it focuses on the external relationship with the third party – that is, the relationship between the principal and the third party, which has been enabled by the agent. This does focus on the issues that are of central concern in this subject guide: the authority of the agent. Yet it ignores the internal relationship between the principal and the agent: the issue of the appointment of the agent, the terms of that appointment, its breach and the consequences of breach. In addition, by focusing on the power of the agent to affect the principal’s legal relations with the third party it excludes many who are commonly called agents and who are the subject of case law commonly accepted as falling within the law of agency. For example, estate agents act as intermediaries in the sale or lease of land; their role is to introduce buyers and tenants to sellers and landlords. However, usually, they do not have the power to bind either party – typically, they merely communicate to the seller the offer made by the buyer and communicate to the buyer the seller’s acceptance or rejection of that offer. Nevertheless, principles of agency law apply to them: so, for example, they owe a fiduciary duty to their principal (see 3.3). Moreover, some of the key cases in agency law have concerned estate agents. It therefore seems odd to exclude them from a definition. (See Sealy and Hooley, pp.95-100.)

Consent theory

A different approach to the definition of agency is taken by US Restatement (Third) of Agency (Tentative Draft No. 2) (2003), § 1.01:

Agency is the fiduciary relationship that arises when one person (a ‘principal’) manifests assent to another person (an ‘agent’) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents to act.

This deals with the criticism of the power-liability theory by focusing on the fiduciary duty owed by an agent to a principal. Since someone will not become a fiduciary unless they have the ability to affect the legal rights and obligations of another person, this definition stresses the need for the ‘agent’ to have functions that are more than merely ministerial.† In other words, the agent must have been invested with a degree of discretion that shows the principal has placed trust and confidence in the agent. It is this which gives rise to a fiduciary duty. Yet this definition has problems too.

† Ministerial = where the agent merely follows the instructions of the principal precisely and has no discretion, that is, no choice over what course of action to take on the principal’s behalf.


By placing attention on the internal relationship between principal and agent, the external relationship with the third party is ignored.

Not all agency relationships arise as the result of prior consent given by the principal – in ratification, A has not been appointed as P’s agent at the time when A represents to T that A is an agent; it is only subsequently that P ratifies the action of A and so adopts the contract with T (see 2.7 below).

Not all agency relationships require the assent of the parties: an agency of necessity is created without the consent of the principal (see 2.8 below).

Consent or assent is only required in a special sense. P and A will have consented if they agreed to what amounts in law to an agency, even if they did not realise that this would be the effect of their words or conduct (Garnac Grain Co Inc v HMF Faure & Fairclough Ltd and Bunge Corpn [1968] AC 1130 at 1137, Lord Pearson). The test is, would the reasonable person define their relationship as amounting to an agency? As has been seen, if P represents to T that A has authority to act as P’s agent, P may be bound by the actions of A even though P did not intend to establish an agency relationship (see 2.5 below).

Qualified consent theory

This approach is discussed by McMeel (see Sealy and Hooley, pp.98-100). It combines the consent theory with the protection of ‘misplaced reliance’ to account for actual and apparent authority (see sections 2.4 and 2.5 below).

Study pack reading ‘Philosophical foundations of the law of agency’ by Gerard McMeel.

Activity 2.1Distinguish between ‘power’ and ‘authority’ in the context of agency. (See Sealy and Hooley, pp.96-100).

2.1.3 Trustees, sellers, buyers, distributors and franchiseesIt is worth distinguishing between an agent and a trustee, a seller or buyer, a distributor and a franchisee (Sealy and Hooley, pp.100-105).

SaleThe distinction between an agent and a seller is sometimes difficult to establish. If A sells to T on behalf of P, A is an agent. But if A buys from P and resells to T, there are two different sale contracts: (i) P sells to A (ii) A sells to T. The key question is what was the intention of A and P, determined objectively? Did they intend that A act as agent of P or as buyer from P? This must often be determined by the circumstances: e.g. was the relationship such that A was under an obligation to account to P for any money received? Was A paid a fee or commission or did A retain the profit from the sale to T? But none of these may be decisive. The use of the word ‘agent’ by the parties will not mean that the person is an agent: ‘the test is ultimately one of substance rather than form’ (Rix LJ in Sealy and Hooley, p. 102).

Distributorship and franchiseIt is commonplace to see a business advertising itself as ‘agent’ for a supplier, but often this does not bring the relationship within the law of agency – as Rix LJ said, the courts look at the substance of the relationship and not its form (e.g. the words the parties use to describe it). Where there is a distributorship or a franchise, there may be an agreement not to sell goods from another supplier, but this does not in itself create an agency. Normally, the distributor or franchisee is a principal who sells a particular brand of product (e.g. Volkswagen cars) or runs a business developed by the franchiser. The consumer who buys goods from either type of business, enters into a contract with the immediate seller and not with the original supplier or franchiser, so that if the goods are defective, the retailer will be liable (the retailer may have a right of action under its contract with the supplier). Whether someone is an agent or a principal – that is,


whether the relationship is an agency or a distributorship/franchise – depends on the intention of the parties: was it their intention that goods supplied would be resold by the recipient acting as principal, or that they would be sold on behalf of the principal?

BailmentA contract of bailment arises where one party (the bailor) delivers or transfers goods to another (the bailee) on terms that require the bailee to deal with the goods as agreed with the bailor (e.g. to return them to the bailor or deliver them to someone at the bailor’s direction). A simple example of bailment is where X leaves a suitcase at the cloakroom of a railway station under terms that X can recover the suitcase. The bailee does not act on behalf of the bailor or enter contracts on behalf of the bailor, but merely exercises certain powers over the property, as agreed by the bailor. The bailee may, however, have the right in law to take certain actions with regard to the property, which have the consequence that the bailor is liable to a third party.

TrusteeThe legal title to the property is held by the trustee for the benefit of the beneficiaries, and so, while required to act, broadly, in their best interests, the trustee does not bring the beneficiaries into legal relations with third parties: it is the trustee who enters into the transactions. The roles of agent and trustee may, however, be mixed: an agent may hold the property of the principal or the third party on trust, and a trustee may also be an agent. But this does not affect the way in which the law views each aspect of their functions.

Activity 2.2a. In what ways might an estate agent not fit the legal definition of ‘agent’?

b. Jane, a shopkeeper, describes herself as ‘sole agent for Bloggs’ Televisions’. Does this mean Bloggs is the principal in any sale by Jane? See WT Lamb & Sons v Goring Brick Co [1932] 1 KB 710.

SummaryThe key characteristics of an agency are:

the agent acts on behalf of another (the principal) so that the principal is bound and can sue or be sued by the third party on the contract made by the agent

the agent is not liable on the contract between the principal and the third party.

2.2 Types of agent


2.2.1 General agent and special agentA general agent acts for a principal in the ordinary course of that agent’s business; a special agent is appointed to act only for a particular transaction that is not part of that person’s ordinary course of business. A solicitor would be a general agent if authorised to undertake a range of legal work for a client, but a special agent if only authorised by the client to sell a house.

2.2.2 Factor and mercantile agentA factor is an agent who is entrusted with the possession of goods or documents of title to goods and who is allowed to sell them in the factor’s own name as a principal (Baring v Corrie [1818] 2 B & Ald 137) or in the principal’s name (Stevens v Biller [1883] 25 Ch D 31).

A mercantile agent is an agent who, in the customary course of business, has authority to sell or to consign goods for sale, or to buy goods, or to raise money on the security of goods (Factors Act 1889, s.1(1)). The general rule is that handing over goods or


documents of title to another does not give that person authority to sell (it may give rise to a bailment), so that anyone buying the goods will not acquire good title: handing over a car to a mechanic for repair does not constitute an authority to sell the car. A disposition by a mercantile agent is an important exception to this general rule.

Where a mercantile agent is in possession of goods or documents of title with the consent of the owner (even if that consent is later revoked but the goods or documents are not returned), and the agent, acting in the ordinary course of business as a mercantile agent, sells or raises money on the security of those goods, that disposition will be valid ‘as if he were expressly authorised by the owner of the goods to make the same’, as long as the third party acts in good faith and without notice of a lack of authorisation (Factors Act 1889, s.1 (1), 2(1), (2); Weiner v Harris [1910] 1 KB 285 (Sealy and Hooley, p.365); Official Assignee of Madras v Mercantile Bank of India Ltd [1935] AC 53 (Sealy and Hooley, pp.1093-4); Jerome v Bentley & Co [1952] 2 All ER 114 (Sealy and Hooley, p.351)). Of course, while the Factors Act provides the third party with rights in the goods so disposed, it does not exempt the mercantile agent from liability to the owner of goods for any breach of authority.

The status of mercantile agent does not arise from the pursuit of a particular profession or occupation. A mercantile agent must conduct a business of dealing in goods: this means that a shop assistant, who sells goods in the course of the business of another (the shop owner), is not a mercantile agent (Lowther v Harris [1927] 1 KB 393 (Sealy and Hooley, pp.365-6)). The Factors Act does not exclude the possibility of someone acting as a mercantile agent in a one-off sale, although it does refer to a mercantile agent as someone ‘having in the customary course of his business as such agent’ authority to dispose of goods, which might suggest past – or the prospect of future – such business.

In practice, the labels ‘factor’ and ‘mercantile agent’ are rarely used – indeed, the term ‘factor’ is more commonly used to describe a company whose business is the purchase (and realisation) of trade debts (debts owed to the company) at discount.

2.2.3 Other agents

BrokerA broker negotiates contracts between a buyer and a seller without having possession of the goods or the documents of title (Baring v Corrie (1818) 2 B & Ald 137). It may not always be obvious for which party the broker acts, but the point is, of course, crucial. For example, an insurance broker is paid commission by the insurance company to which he or she is bringing the business of the insured, but, normally, the broker is the agent of the insured and this means that misstatements or omissions in the application form by the broker may have consequences for the enforceability of the insurance policy. Some brokers act for both buyers and sellers by virtue of the custom of particular markets.

Commission agentIn spite of the title, a commission agent (or commission merchant) buys or sells goods on behalf of the owner without establishing a contractual relationship between the owner and the third party. The commission agent acts as principal in the contract with the third party. Nevertheless, this agent owes to the owner all the duties owed by an ordinary agent to a principal. In a sale, the agent is liable to the third party (the buyer) for breach of the implied terms as to quality. In a purchase of goods, the agent is liable to the third party (the seller) for the price, but is not liable to the principal for the quality of the goods. Such agents are familiar in civil law jurisdictions. While English law is, of course, comfortable with the idea of someone acting as principal in the purchase and then in the sale of goods, the idea that someone can simultaneously act as principal and agent in respect of the goods does not fit easily into English agency law because it does not conform to the idea of an agent as one who is able to alter the legal relations between the principal and a third party. Although there was some limited acceptance of the idea in nineteenth century cases (Ireland v Livingston (1872) LR 5 HL 395; Robinson v Mollett (1875) LR 7 HL 802), it cannot be regarded as part of English law (but see Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] above). English law has,


instead, opted for the much less conceptually satisfactory idea of the undisclosed principal (see 3.2 below). Note that this does not prevent the quite different situation in which one party acts as both principal and as agent. For example, in syndicated loans (where a number of banks lend to a single borrower) it is common for one of the syndicate to also act as agent bank which has the power to collect and make payments for the syndicate and take certain decisions with regard to the loan.

Confirming housesConfirming houses act for overseas buyers wishing to buy goods in English markets. The confirming house can operate in a number of different ways: it may simply buy goods as principal and sell them to the overseas buyer without any suggestion of agency, or it may act as an agent for the buyer, or it may act as agent for the buyer and separately undertake to the seller that the buyer will perform (known as confirmation) (see Sobell Industries Ltd v Cory Brothers & Co [1955] 2 Lloyd’s Rep 82).

Del credere agentWhile a confirming house may guarantee the third party’s performance to the seller, a del credere agent indemnifies the principal against loss incurred by the third party’s failure to pay (Gabriel & Sons v Churchill & Sim [1914] 3 KB 1272). An exporter, who is uncertain about the financial status of a foreign buyer, might find such a guarantee attractive, although the common practice is to obtain a confirmation from a confirming house or to rely either on a documentary credit, under which a bank pays the seller on the presentation of certain documents (see Chapter 8), or on a credit guarantee, where the guarantor pays in the event of a default by the buyer.

Forwarding agentA forwarding agent undertakes the transmission of goods for the principal and is personally liable for the freight charges, which are then recoverable from the principal. Such an agent is obliged to exercise reasonable care in relation to the goods.

Commercial agentThe meaning of this term is discussed at 3.3.

Activity 2.3Read Budberg v Jerwood and Ward [1934] 51 TLR 99 (Sealy and Hooley, p.367). Why was Dr Thadee de Wittchinsky not a mercantile agent and why was this finding significant in that case?

2.3 Creation of agency


There is a distinction between the creation of the agency and the authority that an agent has to act on behalf of the principal, although the two issues are necessarily tangled together since the creation of an agency will involve conferment of authority.

An agency may be created:

a. by express or implied agreement between the principal and agent

b. where there is a representation by the principal to the third party that the agent has authority (agency by estoppel)

c. where the principal ratifies an act by someone who, without authorisation, purported to undertake that act as an agent of the principal

d. by necessity (agency of necessity)

e. where the agency arises under statute, such as when an unpaid seller exercises the right to resell under Sale of Goods Act 1979, s.48(3) (RV Ward Ltd v Bignall [1967] 1 QB 534; Chapter 6).


Typically, an agency is established by consent of both the principal and the agent (but not always: see 2.1.2) but no formalities are normally required. Although the agreement will usually be by contract, this is not necessary: someone who acts out of friendship without payment may be an agent (Chaudhry v Prabhakar [1989] 1 WLR 29; (Sealy and Hooley, pp.203-7)). The appointment may be made orally or inferred from the conduct of the principal and agent showing consent to the establishment of the agency. The agent’s acceptance can be express or may be inferred, as where actions on behalf of the principal can only be explained by the existence of an agency. If, however, the parties do put their agreement into a contractual document, it is likely to be decisive in forming a court’s view of the parties’ intention (AMB Imballaggi Plastici SRL v Pacflex Ltd [1999] 2 All ER (Comm) 249; Mercantile International Group plc v Chuan Soon Huat Industrial Group Ltd [2002] EWCA Civ 288). Note that where a commercial agent (within the meaning of the Commercial Agents (Council Directive) Regulations 1993: see 3.3) has been appointed, the agent is entitled to a signed statement of the terms; but there is no requirement that the contract of appointment is written (reg. 13(1)).

For an agency in the full sense of the word to exist the agent must have some degree of autonomy, otherwise the agent performs merely ministerial functions, that is, the agent acts almost mechanically and without any exercise of discretion. Although someone who acts on behalf of another in a purely ministerial way is, in a general sense, an agent, the nature of their obligations and the relationship with the principal is quite different from the sort of agent with which we are concerned – one with some autonomy and discretion.

The degree of control exercised by one party (the alleged principal) over the other (the alleged agent) may suggest the existence of an agency. However, with some agents the principal’s control is limited because the way in which the agents undertake their activities is dictated by the rules and custom of their business. For example, much of the work of stockbrokers is determined by the rules of the exchange within which they operate. So an alleged principal’s lack of total control does not necessarily indicate that there is no agency relationship.

That the parties did not intend to create an agency may be suggested by the fact that the person carrying out the functions is paid through profit earned in trading rather than through commission, or is entitled to fix the price of the goods being sold or retains money received from sales. Yet such matters are not conclusive since a principal can consent to an agent making a profit or entering into personal contracts with buyers. Even if the principal is not aware that the agent is making a profit and so cannot have consented, this alone cannot be determinative of the existence of the agency since that would enable the agent to define the existence of the agency unilaterally. It would be the same as saying that no agency exists if the alleged agent breaches what would otherwise constitute his or her fiduciary duty (the obligation not to make a secret profit or to undertake other business that conflicts with the interests of the principal).

Activity 2.4Jake tells Anne that he owns a painting by Picasso, which he wishes to sell. Anne knows that Pugwash, who is a wealthy collector, has always admired this painting. Pugwash is away on business and cannot be contacted, but some time ago he expressed to Anne the wish to own the painting and willingness to pay up to £1 million. Anne tells Jake that she is acting for Pugwash and can offer £1 million. Jake accepts. Anne writes to Pugwash telling him of the deal. Pugwash receives the letter, but does not reply. In fact, Pugwash no longer wants the picture. Is Pugwash liable to pay for the painting?

SummaryNormally, an agency will be established by consent of both parties. The parties can create the agency by a written agreement (for example, power of attorney), but it is also possible to imply the existence of the agency from the spoken words or the conduct of the parties.


2.4 The actual authority of the agent


2.4.1 Actual authority of the agentIn 2.1.1 we discussed ‘authority’ when trying to understand and define the nature of agency. Here the word ‘authority’ is used in the sense of the agent’s ability to bind the principal. It is important to note the two different meanings of ‘authority’.

We have seen already that the authority that an agent has to bind the principal is entangled with the creation of the agency. If the principal and agent agree to the creation of the agency, that agreement will embody the authority of the agent. In agency by estoppel, the representation of the principal establishes the authority of the agent to bind the principal and defines the scope of that authority (apparent or ostensible authority: see 2.5).

The principal is bound only by those acts of the agent that are within the scope of that agent’s authority. In Jacobs v Morris [1902] 1 Ch 816, an agent had authority to make, draw, sign, accept or indorse bills of exchange and sign cheques. He represented to a third party, who took him at his word, that he also had authority to borrow. It was held that the principal was not liable: there was no actual authority. (Note that there was also no apparent authority since no representation had been made by the principal to the third party that the agent had authority to borrow.)

2.4.2 Definition of actual authorityThe scope of an agent’s actual authority is important since, generally, it is only if an agent acts within actual authority that the principal is bound (unless bound by apparent authority) and the agent can claim an indemnity from the principal for any expenses incurred or remuneration. In addition, an agent who acts outside their actual authority may be liable to the third party for breach of the implied warranty of authority (see 3.1.6).

The actual authority of an agent is determined by the agreement between the principal and the agent and is, therefore, a matter of contract construction. It consists of:

express actual authority, which is the authority expressly given to the agent by the principal

implied actual authority, which is the authority that can be implied into the agreement between the principal and the agent.

(See Diplock LJ in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 (Sealy and Hooley, pp.113, 118-20).)

2.4.3 Express actual authorityExpress actual authority is the authority which the principal expressly gives to the agent: for example, where the agent is instructed to sell a particular property for the principal. This authority may be contained in documents and/or conversations between the parties (e.g Aviva Life & Pensions UK Ltd v Strand Street Properties Ltd [2010] EWCA Civ 444 at 54). In determining the express authority of an agent, the normal rules for construing contracts apply. (For a discussion of express authority, see SMC Electronics Ltd v Akhter Computers Ltd [2001] 1 BCLC 433.)

What if the instructions from the principal to the agent are ambiguous? In Ireland v Livingston (1872) above and Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147, it was held that an agent who adopts a reasonable interpretation will not be in breach of its mandate. But in European Asian Bank AG v Punjab & Sind Bank (No 2) [1983] 1 WLR 642, Robert Goff LJ observed that this principle could only be used sparingly. Similarly, in Patel v Standard Chartered Bank [2001] All ER (D) 66 at [35]-[36] (see also Cooper


v National Westminster Bank plc [2009] EWHC 3035 (QB)), having referred to these authorities, Toulson J observed:

Obviously it cannot be open to every contracting party to act upon a bona fide, but mistaken, interpretation of a contractual document prepared by the other, and to hold the other to that interpretation… If the instructions are given to an agent, it is understandable that he should expect to act on those instructions without more; but if, for example, the ambiguity is patent on the face of the document, it may well be right (especially with the facilities of modern communications available to him) to have his instructions clarified by his principal, if time permits, before acting upon them. In other words the critical question is not limited to whether the agent’s interpretation was reasonable; it is whether he behaved reasonably in acting upon that interpretation.

Activity 2.5Where the scope of the agent’s actual authority is unclear, what should the agent do?

2.4.4 Implied (or incidental) actual authorityIn addition to express actual authority, the agent may have implied actual authority. It is important to recognise that implied authority cannot contradict express actual authority. Implied actual authority is a way of filling in the gaps in order to make sense of the agency agreement. It is not a means of altering that agreement or of making it in some sense fairer. The analogy is, of course, with implied terms in contract law. Some agents (e.g. those operating in the financial markets, such as stockbrokers and insurance brokers) are, however, subject to terms imposed by statute or to the rules of a particular market and those rules may override the express terms of the agreement or prevent the implication of terms.

The agent will have implied actual authority to do those things that are necessarily incidental to the execution of the express actual authority. The question is, do the powers expressly given by the principal to the agent enable the agent to carry out the specified task, or can that task only be undertaken by implying the authority to do things in addition to those that are expressly authorised? Authorising an agent to enter into a contract to buy land carries implied actual authority to sign the documents required under statute because the requirement for writing in such transactions means that without such authority the agent would not be able to perform the task agreed (Rosenbaum v Belson [1900] 2 Ch 267). On the other hand, in Bryant, Powis, and Bryant Ltd v Law Banque du Peuple [1891-94] All ER 1253, an agent, who had express actual authority by power of attorney to buy or sell goods, charter vessels and employ agents and servants, did not have implied actual authority to borrow money because this was not necessary to carry through the tasks that had been expressly authorised.

The agent may have authority to undertake that which is implied from the particular circumstances of the relationship between this principal and this agent, such as where there has been a consistent previous course of dealings between the parties in which the particular term has always been present.

The agent may have the authority of someone in this agent’s position, trade, business or profession (this is sometimes referred to as usual authority, but should not be confused with Watteau v Fenwick, see 2.6). Here the question is, what authority would the reasonable person in the position of the third party believe that someone in the agent’s situation possessed? The answer will, of course, depend on the knowledge of the third party: if they know of limits on the agent’s authority, there can be no implication that would contradict such knowledge. In Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 (Sealy and Hooley, pp.114-16), it was implied from the appointment of the agent as managing director of a company that they had the normal authority that managing directors possess to undertake the business of the company. On the other hand, an estate agent will not have authority to sell property since this is not what such agents usually have authority to do; but they will have authority to make representations about the property.


Similarly, the agent will have such authority as is customarily enjoyed by someone dealing in the particular market. To imply a custom, it must be uniform, certain, notorious (that is, generally known), recognised as binding and reasonable (Robinson v Mollett [1875] LR 7 HL 802). A broker employed to transact business in a market is authorised to deal according to the usage of that market (Nickalls v Merry [1875] LR 7 HL 530). However, customary authority will not be recognised where it contradicts the express agreement between the agent and the principal or the normal duties owed by the agent to the principal or mandatory statutory provisions. For instance, such custom cannot be admitted to undermine the fundamental nature of the agent-principal relationship. In Robinson v Mollett [1875] LR 7 HL 802, even though it was shown that a custom existed in the London tallow market by which a broker, who was employed to buy goods, could sell their own goods to a principal, the court held that this was not part of the agent’s customary authority because evidence ‘cannot be admitted to convert a broker employed to buy for his employer, into a principal to sell to him’ (Mellor J).

SummaryThe actual authority of an agent is determined by the express agreement (subject to contrary statutory or regulatory provisions) between the parties (express actual authority) and any appropriate implications from the surrounding circumstances (implied actual authority) that do not contradict the express actual authority.

2.5 Apparent authority


2.5.1 Definitions Typically, a third party dealing with an agent will not have knowledge of the terms of the contract between the agent and principal and so will not know the scope of the agent’s actual authority: ‘In ordinary business dealings the contractor at the time of entering into the contract can in the nature of things hardly ever rely on the “actual” authority of the agent.’ (Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] above, Diplock LJ (Sealy and Hooley, pp.113, 118-20); Nayyar & Others v Sapte & Anor [2009] above at [134].) The third party, therefore, relies on a perception of the authority of the agent as represented by the principal. The representation creates an agency by estoppel – in other words, the principal is prevented or estopped from denying the existence of the agency. The representation will also establish the scope of the agent’s apparent (or ostensible) authority. As Lord Denning expressed it, apparent authority is ‘the authority of an agent as it appears to others.’ (Hely-Hutchinson v Brayhead Ltd [1968] above (Sealy and Hooley, pp.114-16)).

An agency by estoppel arises where:

the principal (or someone acting with the actual authority of the principal) represents to the third party that the agent is authorised to undertake the transaction which the agent and the third party subsequently conclude

the agent does not purport to make the agreement as principal

the third party is induced to enter into the transaction in reliance upon the principal’s representation

the third party alters their position to their detriment.

It is unclear whether this last is an additional requirement (Rama Corpn Ltd v Proved Tin and General Investment Ltd [1951] 2 QB 147 (Sealy and Hooley, p.117)), or, as seems likely, it merely reiterates the requirement that the third party enter the transaction in reliance upon the representation (The Tatra [1990] 2 Lloyd’s Rep 51 at 59 (Sealy and Hooley, p.127). But see Spiro v Lintern [1973] 1 WLR 1002, discussed below). See Nayyar & Others v Sapte & Anor [2009] above at [134], for a summary of the law on this issue.


As a result the principal may be bound to a third party even though:

the agent does not have actual authority, or

the agency agreement has ceased, or

the agent acts beyond the actual authority granted by the principal.

This is because the agency is based on estoppel and not the consent of the principal, who may not have intended to create an agency (Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] above (Sealy and Hooley, pp.118-20)).

Where someone is represented by the principal as having authority to act as agent, that person will possess the usual authority of such agents in spite of any restrictions imposed by the principal on the agent (Hely-Hutchinson v Brayhead Ltd [1968] above, Lord Denning MR (Sealy and Hooley, pp.115-17)). In Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd, K and H formed a company to buy and then sell some land. K, H and a nominee of each were appointed directors. The articles of association contained a power to appoint a managing director but none was appointed. K instructed F, a firm of architects, to do work in connection with the land, which they did. On an action by F for their fees, it was held that since K was not the managing director he had no actual authority to employ F, but he did have apparent authority because, with the knowledge of the board of directors, he had acted throughout the transaction as if he were managing director and his action in engaging F was within the usual authority of a managing director.

2.5.2 Representation by the principalIn order to be bound by the apparent authority of the agent, the principal must have represented to the third party that the agent had the necessary authority to conclude the transaction on behalf of the principal and the third party must have a reasonable belief that the agent had such authority. In general, if the representation as to authority comes from the person purporting to be an agent (Nayyar & Others v Sapte & Anor [2009] above at [134]), the principal will not be bound to the third party, although the bogus agent may be liable to the third party for breach of an implied warranty of authority (see 3.1.6).

The decision in ING Re (UK) Limited v R&V Versicherung AG [2006] EWHC 1544 (Comm) involves a fairly complex area of insurance practice, but one of the issues at the heart of the case is the question of the representation of an agent’s authority. For T to claim that P is estopped from denying A’s authority to act as agent, it must be shown that P made a representation about A’s authority to T. T cannot claim that such a representation has been made in circumstances where T believes the relevant statement about A was not intended either for T or for the world at large. Here the alleged representation was contained in a document issued by P that T was not intended to see, and Toulson J held that this did not amount to a representation to T by P any more than it would if T had overheard a conversation (or seen an email intended for another recipient). It was suggested by T in this case that A had authority to pass the relevant document to T, but Toulson J held that it will only be in very unusual circumstances that P will have represented to T that A had such authority (see 2.5.3).

The representation may be by words or by actions. Usually, silence or inaction will not amount to a representation unless there is a duty to say something, which will be rare. However, it arose in Spiro v Lintern above: L said nothing when his wife (who had no authority to do so) entered into a contract for the sale of L’s house, and, as a result, the buyers incurred various expenses in contemplation of completion of the sale; L’s silence amounted to a representation that his wife had authority to sell the house.


2.5.3 Representation by the agentThere is a difficulty, which was touched on in the discussion of the ING case in the previous section. A company acts through its agents, so representations must come from one of the company’s agents. Normally, the agent will not be able to represent their own authority: this representation must come from another agent acting for the principal. But the principal can endow the agent with this authority (actual or apparent) to make representations about the agent’s own authority to act in the transaction for the principal (Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd above; Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd and PS Refson & Co Ltd [1985] 2 Lloyd’s Rep 36 (Sealy and Hooley, pp.123-4)).

This issue arose in First Energy Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194; Reynolds (1991) 110 LQR 21. FE wished to arrange credit facilities through the bank and dealt with J, who was senior manager of the bank’s Manchester branch. FE knew that J was not authorised to grant the credit facilities and that these could only be agreed to by head office. Incorrectly and without authority, J wrote to FE saying that head office had approved the credit facility. The Court of Appeal decided that as a manager J had apparent authority to write to FE informing them of the decision made by head office, and, therefore, the bank was bound by J’s letter indicating that head office had agreed to give the facilities.

Yet that case distinguished Armagas Ltd v Mundogas [1986] AC 717, where the House of Lords dismissed the argument that P had represented to T that A was authorised to make a representation on behalf of P to the effect that A had actual authority to undertake the transaction with T. (See also Sea Emerald SA v Prominvestbank [2008] EWHC 1979 (Comm).) The Lords did not overrule First Energy, but it seems best to treat it as involving an unusual set of facts, which place it at the extreme end of apparent authority. Armagas is the more normal approach.

Certainly, the agent will not have apparent authority to make such a representation where the third party knows, or ought to know, that the agent does not possess authority. In other words, the third party’s knowledge of the agent’s actual authority cannot be overridden by claims as to apparent authority. The reason is that in such a situation the third party has not relied on the representation by the principal. In Overbrooke Estates Ltd v Glencombe Properties Ltd [1974] 1 WLR 1335, a term in an auction sale catalogue said the auctioneer did not have the seller’s authority to make representations about the property being sold. Shortly before the sale the auctioneer told a prospective buyer that the local authority had no plans with respect to the property. The buyer bought the property, and then discovered it was in an area that might be included in a slum clearance programme. It was held that, even if an auctioneer had apparent authority to make such representations (and the judge thought that an auctioneer might only have apparent authority to accept bids), the buyer knew (or ought to have known) the actual extent of authority and was, therefore, bound by it. The Misrepresentation Act 1967, s.3, which limits the ability of parties to exclude or restrict liability for misrepresentation, does not seem to restrict the ability of the principal to exclude or limit the apparent authority of the agent to make representations as to the subject-matter of the contract.

Activity 2.6How can the decisions in First Energy Ltd v Hungarian International Bank Ltd and Armagas Ltd v Mundogas be distinguished?

Useful further reading On apparent authority and the decision in Watteau v Fenwick (see 2.6), see

Brown, I. ‘The significance of general and special authority in the development of the agent’s external authority’ [2004] Journal of Business Law pp.391-422.


SummaryWhere the principal (or an agent with actual or apparent authority) represents to the third party that the agent is authorised to undertake the transaction and the third party is induced to enter into the transaction in reliance upon that representation, the principal will be bound. The principal will not be bound where the representation on which the third party relied came from the agent undertaking the transaction, unless this agent had authority to make representations on behalf of the principal.

2.6 Usual authority: Watteau v Fenwick


Study pack reading ‘Agents, business owners and estoppel’ by Andrew Tettenborn

The decision in Watteau v Fenwick [1893] 1 QB 346 (see Tettenborn, A. ‘Agents, business owners and estoppel’ [1998] CLJ 274) has proved troublesome. Although it has almost no impact on the courts’ approach to matters of agency law, it is worth discussing because it provides an opportunity to consider certain distinctions in agency law. Various questions surround this case of which the most important is: was there an agency and, if not, why was the ‘principal’ liable? Reading the case for the first time, one might be surprised at the fuss: the reader would be forgiven for thinking this is clearly a case on agency, not least because that is what the court believed.

In outline, in this case F, who owned a hotel, appointed H as manager. H was expressly forbidden from buying any goods other than mineral water and bottles of beer. H had previously owned the hotel and his name remained above the door as the licensee. H ordered cigars from W, who believed he was the owner of the hotel. F was held liable for the price of the cigars.

It might be argued that W did not think H was an agent; he believed H to be the principal, so if W had not been allowed to enforce the contract against F, W would have lost nothing because he was unaware of F’s existence. Against this it might be said that F’s action in allowing his agent, H, to represent himself as the principal placed W in a weakened position. W had every reason to suppose that H was the principal and this misconception was facilitated by F.

In the case, Wills J based his conclusion on usual authority, that is, on the implied authority of an agent who is appointed to a particular role by the principal or represented by the principal as occupying that role. But this leaps over the main question as to whether an agency exists – consideration of the scope of implied authority is relevant only if it is established that an agency exists. Leaving that aside, W did not know that H was an agent and so could not make assumptions about his authority. W believed that H was the principal, not an agent, and so made assumptions as to the implied authority of H.

Might it be a decision on apparent authority? Again, the answer must be no because F made no representation to W that H was acting as F’s agent (nor did H): W believed H was acting as principal in the transaction.

Similarly, the principal cannot ratify the transaction (this is where P adopts an unauthorised transaction: see 2.7) because it is essential to the doctrine of ratification that the third party is told that the ‘agent’ is acting as such. H did not tell W that he was an agent and, in any event, it seems hard to argue that F adopted the transaction. The other possibility is the doctrine of undisclosed agency/principal (where the existence of the agency is not disclosed to the third party at the time of the transaction), but that requires the agent to have entered the transaction with the actual authority of the principal (see 3.2).


At the core of the objections to treating this as a case on agency is, therefore, the simple fact that H was not an agent in regard to the purchase of the cigars. H had no actual authority, F did not make any representation to W that H acted as agent in the purchase and, even if H had apparent authority to represent his own authority (like the manager in First Energy), he did not do so – throughout W believed H was the principal.

It has been suggested that this case is an example of estoppel by conduct, not agency. F had put H into a position that made it appear not that H was an agent but that the owners of the hotel and H were not distinct parties. H might be seen as a principal with respect to W and an agent with respect to F, and F was estopped from defending an action by W for the price of the cigars because of F’s conduct. The other possibility is that H was a principal with respect to both parties, but that he had a duty to account to F.

The stumbling block to all of these explanations is, of course, that Wills J clearly believed he was merely applying the doctrine of usual authority; this might prompt us to conclude that since this was incorrect, he got the decision wrong (hard though this is when he was supported by Lord Coleridge CJ). Other jurisdictions have rejected the case: for instance, it has been expressly overruled by one Canadian court (Sign-O-Lite Plastics Ltd v Metropolitan Life Insurance Co [1990] 73 DLR (4th) 541). In the English courts, Bingham J (later Lord Bingham) called the decision ‘puzzling’ (Rhodian River Shipping Co SA v Halla Maritime Corp [1984] 1 Lloyd’s Rep 373), but it has not been overruled. It is certainly difficult to find cases in which it has been applied: the citation in Mellor v Lydiate [1914] 3 KB 1141 was on a separate point (The decision was cited, without discussion, in the Scottish case, Graham v Stirling [1922] SC 90.) In similar circumstances the courts have tended to hold the contract to be between the ‘agent’ personally and the third party – that is, A and T are found to be the principals (Kinahan & Co v Parry [1911] 1 KB 459. See also Jerome v Bentley & Co [1952] 2 All ER 114.)

Activity 2.7Is the decision in Watteau v Fenwick wrong?

SummaryThe decision in Watteau v Fenwick is difficult to explain or defend. It does not fit into any of the well-defined categories of agency and the general disinclination of the English courts to apply the decision or even to refer to it might suggest that it is to be treated either as an anomaly or as wrong.

2.7 Ratification


2.7.1 Requirements for ratificationThe principal will be bound where it validly ratifies a transaction entered into by someone purporting either to act as its agent when that person has not previously been appointed as such, or by someone purporting to possess authority beyond that granted by the principal. This is not apparent authority because the agent represents their own authority, and it does not seem to fall within Watteau v Fenwick because there the agency was not made apparent.

If the third party goes ahead with the transaction on the basis of the agent’s representation, there is a risk that the agent is lying about the existence of actual authority and that the principal will not later ratify the transaction. There are various reasons why a principal might ratify: the principal may be happy with the deal, or may be unhappy with the transaction but decide to ratify it to maintain commercial reputation or to preserve the reputation of the agent. However, in determining if there has been ratification, the motive of the principal is irrelevant.


There are a number of requirements for valid ratification.

At the time of the relevant act, the agent must have intended to act on behalf of the principal. This intention is gathered from the terms of any contract and surrounding circumstances (National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582).

The purported agency must be revealed to the third party before the transaction is concluded. There can be no ratification where A makes the contract as principal (Keighley, Maxsted & Co v Durant [1901] AC 240 (Sealy and Hooley, pp.140-42)). In this case, the justification is, according to Lord Macnaghten, that ‘civil obligations are not to be created by, or founded upon, undisclosed intentions’ (but see 3.2). The identity of the principal need not be disclosed, ‘but there must be such a description of him as shall amount to a reasonable designation of the person intended to be bound by the contract’ (Watson v Swann [1862] 11 CBNS 756, Willes J (Sealy and Hooley, p.143)). It will be sufficient if the agent states that they are acting for a class of persons to which the principal belongs (National Oilwell (UK) Ltd v Davy Offshore Ltd above. Contrast that decision with Southern Water Authority v Carey [1985] 2 All ER 1077).

The third party must believe that the person with whom they are dealing has authority to act for another. If, for example, the agent tells the third party that the agreement is subject to ratification, any action by the principal will not bring it within the doctrine of ratification because, in effect, the agent is saying there will be no contract until the principal has approved it. In such circumstances the principal’s ‘approval/ratification’ may, however, amount to an acceptance of the third party’soffer so that the contract comes into existence at that point and does not date back to the time of the original agreement, as is the case where there is effective ratification (see 2.7.2).

The principal must be competent to enter the contract at the time of the original act by the agent. Did the principal have capacity to contract given that the ratification dates back to the time of that original act? (see 2.7.2). For instance, did the company have authority under its constitution to do this act? (On capacity, see 2.9.)

The principal must also be competent at the time of ratification. For example, an enemy alien cannot ratify, even if at the time of the contract P was not an enemy alien (contracts with an enemy alien – someone who is resident in a country with which this country is at war – are void for illegality). Since ratification relates back to the moment of the original act (see 2.7.2), there is an argument for looking solely at whether the principal was competent at that time, but, of course, a principal who lacks competence (such as a company that has been wound up or a person who has lost mental capacity or an enemy alien) would not be able to signify ratification.

Ratification must occur within a reasonable time after the action of the purported agent (The Managers of the Metropolitan Asylums Board v Kingham [1890] 6 TLR 217). What constitutes a reasonable time will depend on the circumstances, but ratification may still occur even after the contract has commenced: e.g. an insurance policy may be ratified after loss (Williams v North China Insurance Co [1876] 1 CPD 757). Ratification may be implied from the failure to act within a reasonable period of time, although it is likely to be difficult to show that inaction indicated a clear intention to ratify.

There are no formalities for a valid ratification, but it is essential that the principal must have intended to ratify. The principal will only be held to have ratified if they did so with full knowledge of the facts or if it is clear that the principal is willing to adopt the act whatever the facts (Marsh v Joseph [1897] 1 Ch 213). Ratification can be express or implied from conduct as long as the intention to ratify is clear and unequivocal: e.g. where the principal sues the third party on the contract (Aviva Life & Pensions UK Ltd v Strand Street Properties Ltd [2010] EWCA Civ 444 at [73]). An authorised agent can ratify (Suncorp Insurance and Finance v Milano Assicurazioni SpA [1993] 2 Lloyd’s Rep 225) and there seems no reason why a purported ratification by an agent, who had no authority to ratify, cannot itself be ratified – indeed, of course, a company can only ratify through its agents.


An attempt to ratify only part of a contract and repudiate the rest will, generally, operate as ratification of the whole (Suncorp Insurance and Finance v Milano Assicurazioni SpA above. But see Marsh v Joseph [1897] 1 Ch 213).

Activity 2.8Why was the attempt to ratify ineffective in Boston Deep Sea Fishing and Ice Co Ltd v Farnham (Inspector of Taxes) [1957] 1 WLR 1051?

2.7.2 Effect of ratificationRatification puts the parties into the position they would have been in had the act been authorised from the outset: ‘Ratification when it exists is equivalent to a previous authority’ (Lord Lindley in Keighley, Maxsted & Co v Durant [1901] AC 240 (Sealy and Hooley, pp.140-42)). This means the principal can sue or be sued by the third party. The agent will not be liable to the principal for excess of authority, nor to the third party for breach of the implied warranty of authority. The agent may be entitled to be indemnified by the principal for any liability incurred. In Suncorp Insurance and Finance v Milano Assicurazioni SpA above, Waller J suggested that, while ratification normally relieves the agent from personal liability to the principal, the principal might be able to ratify without waiver of any breach of duty by the agent (where the agent exceeds their authority).

Since ratification puts the parties into the same position as if the act had been authorised from the outset, then logically it relates back to the moment of the original contract. The unusual consequence of this was illustrated by Bolton Partners v Lambert (1889) 41 Ch D 295 (Sealy and Hooley, pp.142-44). S accepted an offer from L on behalf of B but without B’s authority. L later withdrew the offer and only then did B ratify. It was held that the contract was binding on L. No real reasoning was provided for this other than that ratification meant ‘the agent is put in the same position as if he had had authority to do the act at the time the act was done by him’ (Cotton LJ). This rule may seem unfair since it allows the principal – but not the third party – to choose whether or not to ratify. Yet, it can be argued that the third party who believed themselves to be bound by the contract and so to hold the principal, who declines to ratify, liable would be even more unfair. If the principal fails to ratify, the third party may be able to bring an action for breach of warranty of authority against the agent.

There are limits to the rule in Bolton Partners v Lambert. In addition to the requirements already discussed (2.7.1), ratification is not likely to be effective in the following situations:

If the interests of someone other than a party to the original contract are unfairly affected, or if the unauthorised act was void as a nullity. In Brown v Bird [1850] 19 LJ Ex 154, without authority the seller’s agent sought to stop goods in transit (a remedy available to the seller where the buyer fails to pay for goods). Before the seller ratified this action the goods had reached the trustee in bankruptcy of the buyer. The ratification was held to be ineffective. On the other hand, in Presentaciones Musicales SA v Secunda [1994] Ch 271, solicitors issued a writ without authority; this action was later ratified, but that ratification came outside the statutory time limits for issuing the writ. It was held that the ratification was effective. The majority in the Court of Appeal regarded the solicitors’ action as valid and contrasted this with the situation in Brown; Roch LJ, however, agreed that the cases showed ratification could not occur where a third party would be deprived of their property rights (see also, Brook v Hook [1871] LR 6 Exch 89; Owners of the ship ‘Borvigilant’ v Owners of the ship ‘Romina G’ [2003] EWCA Civ 935 (Sealy and Hooley, pp.145-46)).

If the agent and the third party rescind the agreement before ratification (Walter v James [1871] LR 6 Exch 124).

Study pack reading ‘The principle in Bird v Brown revisited’ by Tan Cheng-Han.


Activity 2.9Read Brook v Hook (1871) LR 6 Exch 89.

J forges H’s signature on a promissory note. The forgery is discovered. H wants to protect J from prosecution; can H ratify the promissory note? (A promissory note is an unconditional promise to pay made by one person to another and signed by the maker: see Sealy and Hooley, pp.770-73.)

SummaryWhere an agent exceeds their authority or purports to act as agent but has not been appointed as such, the person on whose behalf they purport to act is not bound, unless that person ratifies. In general, ratification puts the principal, agent and third party in the same position as if the act had been undertaken with authority.

2.8 Agency of necessity


In a restricted range of emergencies, an agency may arise as a matter of law. This may result in one of the following consequences: A may be empowered to enter into a contract with T that binds P; A may be empowered to sell P’s goods to T without giving rise to a contract between T and P; and A may be entitled to reimbursement from P for actions taken on P’s behalf, which may also not involve a contract. Although these three situations are often spoken of as aspects of the agency of necessity, in truth only the first amounts to an agency. Moreover, if A does make a contract that binds P and T is unaware that A is acting for P, this would seem to be an undisclosed agency which should mean that T can bring an action on the contract against either A or P (see 3.2).

The courts are reluctant to hold P liable on the ground of necessity. Certainly, they rarely seem to countenance a claim brought by someone with whom P has no existing agency relationship. In other words, the argument is more likely to succeed (although this should not be overstated) if A has acted beyond their authority than if A had no prior authority (China-Pacific SA v Food Corporation of India, ‘The Winson’ [1982] AC 939 (Sealy and Hooley, pp.134-7). But see also: The Choko Star [1990] 1 Lloyd’s Rep 516; Reynolds, ‘Necessity in the Law of Agency’ [1992] JBL 505; Surrey Breakdown Ltd v Knight [1999] RTR 84, [1998] EWCA Civ 729).

The agency of necessity may arise where certain conditions are fulfilled:

P’s property is in A’s possession as the result of an existing legal relationship, such as a contract of bailment. This excludes claims by strangers, such as someone who finds the goods

A is unable to obtain instructions from the owner

an emergency threatens the property; it is not sufficient for A to show that P’s property is causing A hardship or inconvenience (Sachs v Miklos [1948] 2 KB 23)

A takes action in good faith and that action is commercially reasonable, proportionate and in the interests of P (Prager v Blatspiel, Stamp and Heacock Ltd [1924] 1 KB 566).

Since it is a characteristic of an agent that they can affect the legal relations of the principal, it might be argued that those ‘agents’ who only have the right to claim expenses or to defend an action are not true agents of necessity and that the only true agency of necessity is the master of a ship who acts to save the ship or its cargo in an emergency. It has been said that this agency of necessity derives from the peculiar position of the master of a ship and ‘affords no analogy to the case of an ordinary agent’ (Hawtayne v Bourne [1841] 7 M & W 595 at 599, Parke B).


Certainly, the area is confused because many situations which are treated as agency of necessity seem to be examples of the implied actual authority of the agent, or of an implied term of a contract, or of the application of the law of restitution (Sealy and Hooley, pp.136-38). For example, the requirement that P’s property is in A’s possession as the result of an existing legal relationship may mean that the obligation to reimburse expenses arises from an implied term in that contract rather than from the agency of necessity. In The Great Northern Railway Company v Swaffield (1874) LR 9 Exch 132, a carrier conveyed a horse to its destination and, when the owner failed to collect it, incurred expenses for feed, stabling, etc. The carrier successfully defended an action for conversion and recovered the expenses incurred. Some of the judges did talk of this as a case of expenses being necessarily incurred, but the test they applied was the same as would be used to imply a term. The obligation to pay the expenses is better explained as a term of the contract of carriage or of the contract of bailment, both of which contracts require the carrier to take reasonable care of the horse.

Useful further reading Brown, I. ‘Authority and necessity in the law of agency’ (1992) 55 MLR 414.

Activity 2.10M owned a house and rented out rooms. In 1940 she agreed to store in her house furniture belonging to her friend, S. M did not charge S and agreed to keep the furniture until such time as S wished to collect it. M and S stayed in contact for another year, but after that M heard nothing from S, who appeared to have moved. In 1943 the house suffered damage, and, as a result, the room in which the furniture was stored was required for letting. M tried to trace S, but without success. In 1944, M sold the furniture. Two years later S sued M in the tort of conversion. Could M argue that the circumstances gave rise to an agency of necessity?

2.9 Capacity

2.9.1 Capacity of the principalThe general rule is that whatever a principal is competent to do personally may be delegated to an agent. Conversely, a principal cannot authorise an agent to do an act that the principal is not competent to undertake: e.g. an enemy alien cannot authorise an agent to undertake any act within the jurisdiction (Boston Deep Sea Fishing and Ice Co Ltd v Farnham (Inspector of Taxes) [1957] 1 WLR 1051).

Where the principal’s ability to enter into a contract is qualified by age, the agent’s capacity is also qualified. The principal, on acquiring the necessary capacity, can avoid a contract made by the agent. The agent’s capacity is terminated by the death of the principal or, where the principal is a company, liquidation or winding-up.

2.9.2 Capacity of the agentSince the agent is acting for the principal, the capacity of the agent to enter the particular transaction on the agent’s own behalf is, generally, irrelevant. For example a minor (someone below the age of legal capacity) who is a partner of a firm can bind the partnership even if, had the minor entered into the contract on his or her own behalf, he or she would not have been bound. Similarly, the fact that the agent would have the capacity to undertake a transaction on their own behalf will not supply the deficiency of the principal: an enemy alien wishing to sell goods in England does not remedy their own contractual incapacity by employing an English agent. Finally, it is important to note that some agents, such as solicitors and insurance brokers, are required by statute to have particular qualifications before they can act for a principal in respect of certain transactions.


SummaryAnyone can appoint an agent, but the agent’s competence to engage in transactions is restricted by the competence of the principal. The reverse is, generally, not true: an agent can undertake transactions on behalf of the principal that would be outside the agent’s personal capacity.

Sample examination question‘Actual authority and apparent authority are quite independent of one another. Generally they co-exist and coincide, but either may exist without the other and their respective scopes may be different.’

Discuss.

Advice on answering the question

This quote is taken from the judgment of Diplock LJ in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 (Sealy and Hooley, pp.118-20). A good answer would outline what is meant by actual authority and apparent authority, and then highlight the distinction between them.

Actual authority is based on the consensual agreement between the principal and the agent, while apparent authority is concerned with the appearance of authority as represented to the third party, even though the agent lacks actual authority. While it is common for the apparent authority of an agent to coincide with their actual authority, the third party’s knowledge of the agent’s authority will almost always depend upon a representation by the principal. The relationship between the agent and principal will be governed by actual authority. This means that the agent may be in breach of its agreement with the principal, but the principal may be bound to the third party.


Reflect and review







Ready to move on


Need to study again

I can define the term ‘agent’.

I can explain how an agency is created.

I can discuss the scope of the agent’s authority.


Must revise

Revision done

2.1 What is an agency?

2.2 Types of agent

2.3 Creation of agency

2.4 The actual authority of the agent

2.5 Apparent authority

2.6 Usual authority: Watteau v Fenwick

2.7 Ratification

2.8 Agency of necessity

2.9 Capacity

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36

3.1 Relationship with third party: disclosed agency . . . . . . . . . . . . . .37

3.2 Relationship with third party: undisclosed principal . . . . . . . . . . . .41

3.3 Relationship between principal and agent . . . . . . . . . . . . . . . . .45


3 Agency 2


Introduction

This chapter analyses the rights and obligations that arise in two situations. These are:

where the principal is disclosed or known to the third party

where the third party is not aware of the principal’s identity, either because it is not disclosed or because the third party is unaware that there is a principal behind the agent.

The discussion of agency concludes with the relationship between the principal and agent.


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

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

outline the rights and obligations arising between the principal and the agent.


3.1 Relationship with third party: disclosed agency


3.1.1 Principal-third partyIf an agent (A) enters into a contract with a third party (T) and prior to that contract A names the principal (P) or, at least, the principal can be identified, this is a disclosed agency (also known as disclosed principal). The third party’s contract is with the principal and not with the agent.

Where a person contracts as agent for a principal the contract is the contract of the principal and not that of the agent; prima facie at common law the only person who may sue is the principal, and the only person who can be sued is the principal. (Montgomerie v United Kingdom Mutual Steamship Association [1891] 1 QB 370, Wright J (Sealy and Hooley, pp.149-50)).

Where A exceeds their authority, the question of whether P is liable to T depends on the existence or not of apparent authority that covers the transaction. If it does, P is fully liable to T (although A may be liable to P for breach of their agency agreement). If it does not, P is not liable to T, but A may be liable to T for breach of the implied warranty of authority as, by representing their authority to T, A promises that they have such authority. It is possible for A to agree with T to be liable on the transaction, but this is separate from P’s liability.

Lord Scarman preferred a rather different approach from that of Wright J – one more in line with the general presumption underlying contract law. His view was that everyone is liable for their contracts, even where they act for another, unless they can show that this liability is removed by the law of agency (Yeung Kai Yung v Hong Kong and Shanghai Banking Corpn [1981] AC 787 at 795).

The principal may sue or be sued on the contract with the third party, if the agent discloses the agency and:

acts within actual authority

acts without actual authority and the principal ratifies.

The principal may also be sued if the agent acts within apparent authority, but the principal cannot sue the third party unless there has been ratification. This is because apparent authority arises out of an estoppel which prevents the principal from raising a defence to an action by the third party, but does not give the principal a right of action; that right only arises if the principal ratifies the unauthorised action.

In response to a claim by the disclosed principal, the third party can use:

any defence or claim arising from the contract

any defence or claim available against the principal.

A defence or claim available against the agent and unconnected with the contract cannot be used against the principal.

3.1.2 Principal-third party: payment In general, payment by the third party to the agent does not constitute payment to the principal. A third party can only discharge a debt owed to the principal by paying the agent in a limited number of circumstances (Irvine & Co v Watson & Sons [1880] 5 QBD 414. (Sealy and Hooley, pp.152-54)). These circumstances are:

if an express or implied term of the contract specifies this method of payment

if the agent has actual authority from the principal to receive payment


if the principal is estopped from denying the right of the third party to pay the agent because the payment was induced by a representation by the principal (in effect the principal represented that payment to the agent would discharge the debt)

if this method of payment was ratified by the principal: e.g. the third party will be discharged if payment is made to the agent, who had no authority to receive it, and the agent passes that payment to the principal, who accepts it.

The same principles apply where the payment is due from the principal to the third party. In Heald v Kenworthy [1855] 10 Exch 739, Parke B said:

…if a person orders an agent to make a purchase for him, he is bound to see that the agent pays the debt; and giving agent money for that purpose does not amount to payment, unless the agent pays it accordingly… I think that there is no authority for saying that a payment made to the agent precludes the seller from recovering from the principal, unless it appears that he [the seller] has induced the principal to believe that a settlement has been made with the agent.

In Wyatt v Marquis of Hertford [1802] 3 East 147, the third party gave the agent a receipt for payment and on this basis the principal reimbursed the agent. In fact, the agent had made no payment, but it was held that the debt owed by the principal had been discharged.

3.1.3 Principal-third party: misrepresentation by the agentA misrepresentation is a false statement of fact upon which the person to whom it is made relies and which leads them to enter into a contract with the person who made the misrepresentation. The normal remedy is rescission of the contract and/or damages. Where the agent makes the alleged misrepresentation, the principal is liable if the agent was acting within their actual or apparent authority or the principal ratified. There is no requirement that the principal should be aware of the agent’s action, and it does not matter that the agent acted for their own benefit and not for that of the principal (Lloyd v Grace, Smith & Co [1912] AC 716).

There is no fraudulent misrepresentation (which constitutes the tort of deceit) if the agent honestly believes the truth of the statement that turns out to be false and the principal, while knowing the truth, does not know that the agent is going to make the statement (Armstrong v Strain [1952] 1 KB 232).

An agent does not come within the terms of the Misrepresentation Act 1967, which was designed to deal with the liability of the contracting parties for pre-contractual representations. An agent is, therefore, not liable to the third party for the misrepresentation (Resolute Maritime Inc v Nippon Kaiji Kyokai (The ‘Skopas’) [1983] 1 WLR 857), unless it amounts to the tort of deceit or negligence (under Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, which you will have studied in the Law of tort course). The principal may also be liable for such tortious actions by an agent who acted within actual or apparent authority.

Activity 3.1A is commissioned to find a buyer for a house owned by P. T expresses interest in buying. A falsely tells T that another person is also interested in the property and that if T pays in excess of the asking price he would secure it. A also falsely tells T that a tenant is willing to rent part of the property. Relying on these statements, T enters into a contract to buy. Advise T, who has now discovered the truth.

3.1.4 Agent-third party: liability to the third party on the contractThe general rule is that where the agency is disclosed, the principal alone is liable on the contract. However, as Lord Scarman pointed out, ‘It is not the case that, if a principal is liable, his agent cannot be.’ (Sealy and Hooley, p.161) The agent may make himself or herself personally liable in addition to the principal. The onus of proof is on the party alleging that the agent is personally liable (Vlassopulos (N & T) Ltd v Ney Shipping Ltd: The Santa Carina [1977] 1 Lloyd’s Rep 478).


Where A contracts with B on behalf of a disclosed principal C, the question whether both A and C are liable on the contract or only C depends on the intention of the parties. That intention is to be gathered from (1) the nature of the contract, (2) its terms and (3) the surrounding circumstances... The intention for which the Court looks is not the subjective intention of A or of B. Their subjective intentions may differ. The intention for which the Court looks is an objective intention of both parties, based on what two reasonable businessmen making a contract of that nature, in those terms and in those surrounding circumstances, must be taken to have intended. (Bridges & Salmon Ltd v The ‘Swan’ (Owner) [1968] 1 Lloyd’s Rep 5, Brandon J (Sealy and Hooley, pp.165-67)).

Where someone signs a contract in their own name and without any qualification,the general rule is that they assume personal liability, unless it is clear from the proper construction of the document that the signatory signed in the capacity of agent for another.

Affixing a label, such as ‘agent’ or ‘director’ is not sufficient by itself to displace the presumption that the signatory was signing on their own behalf. It must be made clear that the signatory is acting in a representative capacity. In Universal Steam Navigation Co Ltd v James McKelvie & Co [1923] AC 492 (Sealy and Hooley, p.162-64), the contract was signed ‘as agents’. This showed that they did not sign as principal and, therefore, did not incur personal liability. Signing ‘for’ another has the same effect. On the other hand, in The ‘Swan’, Brandon J thought that merely adding the word ‘agent’ or ‘director’ would not, normally, relieve the signer of liability (but see Viscount Cave LC and Lord Sumner in Universal Steam Navigation). Care must be taken in applying these decisions because words used in one contract may have a different meaning in another contract.

A term rendering the agent personally liable may be implied by the custom of the agent’s trade. In Fleet v Murton [1871] LR 7 QB 126, it was held that there was a custom in the London fruit trade that the agent was personally liable if the name of the principal was not disclosed.

Before company incorporation

A company cannot be bound by contracts entered on its behalf before incorporation for the simple reason that at that stage the company does not exist and it cannot, therefore, make contracts. For the same reasons the unincorporated company cannot appoint an agent to act on its behalf. In Kelner v Baxter [1866] LR 2 CP 174 the promoters of a hotel company contracted for the purchase of wine before the company was incorporated. Upon incorporation the company ratified this action and the wine was drunk. Before payment the company went into liquidation. The promoters were held personally liable. The company did not exist and so could not contract.

Under s.51(1), Companies Act 2006 someone who purports to make a contract on behalf of a company that has not been formed will be personally liable. The knowledge of the third party and the intention of the agent are irrelevant. The section is ‘subject to any agreement to the contrary’, which requires the agent’s personal liability to have been expressly excluded (Phonogram Ltd v Lane [1982] QB 938).

Making those who act on behalf of an unincorporated company personally liable may cause difficulties for promoters who legitimately wish to enter into contracts – for example, to lease premises – so that trading can begin immediately upon incorporation. The most obvious solution is novation where, with the consent of the third party, the contract with the promoter is substituted by a contract with the company (Howard v Patent Ivory Manufacturing Co [1888] 38 LR Ch Div 156).

Activity 3.2a. Why could the company not ratify the contract after incorporation in Kelner v

Baxter?


b. Will Jake be liable in either of the following situations?

i. He signs contract as follows:

ii. He signs another contract as follows:

3.1.5 Agent-third party: merger and election If the agent is personally liable, the third party must choose to sue either the principal or the agent and, having chosen, cannot change their mind. If T sues A, but A cannot pay, T cannot turn to P. The operation of this rule seems harsh and probably does not reflect the expectations of the parties. The reason the parties wished to hold both principal and agent liable must have been to give the third party alternative actions.

This process of choosing by the third party is called merger or election. Although Scrutton LJ saw no distinction between them (Debenhams Ltd v Perkins [1925] 133 LT 252 (Sealy and Hooley, pp.157-58)), there are differences and merger may occur in circumstances where there can be no election.

Election involves a choice: the third party is aware of the agency and chooses to sue one party rather than another. Election can only be made by a third party with full knowledge of the relevant facts. The election must be clear and unequivocal (e.g. obtaining judgment).

Merger involves the idea that the principal and the agent are liable in the alternative so that if judgment is obtained against one, the other is discharged from liability even if the judgment is not satisfied (because, for example, the debtor is insolvent).

Thus if the third party sues the agent before the agency is disclosed there cannot be election, but the doctrine of merger may apply so the third party cannot later sue the principal.

Professor Reynolds (‘Election distributed’ (1970) 86 LQR 318) has suggested that many of the cases treated as merger and election could be seen as situations in which the agent contracted as principal. Whatever the merits of this view, it does serve as a reminder that it is necessary to determine the contracting parties and whether agency is involved at all.

Study pack reading ‘Election distributed’ by F.M.B. Reynolds.

3.1.6 Agent-third party: liability for breach of warranty of authorityIf the ‘agent’ acts without actual or apparent authority (and does not act as principal) and the ‘principal’ has not ratified, neither will be liable on the ‘contract’ with the third party (although see Watteau v Fenwick, in 2.6 above). But the ‘agent’ has impliedly contracted that authority exists and, therefore, is liable if there is no such authority and the third party was induced by the representation of authority to act in a way that they would otherwise not have done. The representation must be as to the ‘agent’s’ authority to act for the ‘principal’. So, where A is appointed by B to act for B in a transaction that is (unknown to A) fraudulent, A is not liable for breach of warranty of authority because A was acting as agent for B and within the authority granted by B (Frank Houlgate Investment Co Ltd v Biggart Baillie LLP [2009] CSOH 165 at [21]). This warranty of authority does not extend to a promise that the main contract will be performed.

Liability is strict. It is no defence to show that the misrepresentation was the result of an honest, but mistaken, belief about the existence or extent of the authority, or that the agent had no means of knowing that actual authority had ended. In Yonge v


Toynbee [1910] 1 KB 215 (Sealy and Hooley, pp.174-76), a firm of solicitors was held liable when they acted for a client without knowing that, subsequent to their appointment as agent, the client had become insane which illness automatically terminated their authority to act (but see Drew v Nunn [1879] 4 QBD 661 (Sealy and Hooley, pp.258-60)).

The ‘agent’ will not be liable where the third party ought to have known that no warranty of authority was being given so that the ‘agent’ was not professing to act as agent, or where the ‘agent’ was appointed under a power of attorney and was unaware that it had been revoked (Powers of Attorney Act 1971, s.5(1)).

Activity 3.3What knowledge of the termination of authority must the agent have to be liable for breach of warranty of authority?

3.1.7 Agent’s liability in tortAn agent may be liable in the tort of negligence if they have assumed responsibility to the third party so as to give rise to a duty of care to a third party and act in a way that breaches the duty of care and causes loss of a type that was reasonably foreseeable. An agent who makes a fraudulent misrepresentation, may be personally liable in the tort of deceit, and here there is no requirement to show that the agent assumed responsibility to the third party (Sealy and Hooley, pp.161-62).

3.1.8 Agent-third party: agent’s right to sue third party The agent cannot sue on the contract between the principal and the third party, but there are exceptions to this general rule: for example, where the parties intend that the agent shall be able to sue and where an agent, who is liable on a contract because of the Companies Act 2006, may also enforce that contract (Braymist Ltd & Others v Wise Finance Co Ltd [2002] EWCA Civ 127).

Activity 3.4a. What was the decision in Rayner v Grote [1846] 15 M & W 359 (Sealy and Hooley,

p.172)?

b. Might the result in that case have been different if there had been no performance and the agent/principal had sought to enforce the contract, or if the buyer had not discovered the identity of the principal until after delivery?

SummaryWhere an agent acts within the scope of their authority, any contract is the contract of the principal and the agent cannot sue or be sued on it, unless there is a contrary intention. Neither the principal nor the agent will be liable on a ‘contract’ made with the third party where the agent acted without actual or apparent authority and the principal has not ratified. However, the third party may be able to bring an action for breach of warranty of authority by the agent.

3.2 Relationship with third party: undisclosed principal


3.2.1 The undisclosed principalThere is no legal requirement that the agency be disclosed. T may not be aware that they are dealing with an agent. This is known as undisclosed principal or undisclosed agency. Up to this point, the law of agency in respect of third parties seems relatively consistent in that it involves representations made by the principal to the third party, but on entering the realm of undisclosed principals this consistency vanishes. Here the


existence of the agency is not disclosed: T may have given no thought to whether or not A is acting for someone else, or T may believe that A is the principal. Here A and T are the contracting parties, until T discovers that there is a principal standing behind A, in which case T can elect to sue P rather than A, if there is a breach; or before that occurs, P may intervene to enforce the contract. It is important to emphasise that the contract is between the agent and a third party. The undisclosed principal, therefore, intervenes in an existing contract.

The doctrine is difficult to reconcile with the idea that contract rests on agreement between the parties for here the third party enters a contract only to discover that the other contractor is merely an agent and that the contract is with someone entirely different. The reason for this, according to Lord Lindley, is that, ‘in the great mass of contracts it is a matter of indifference to either party whether there is an undisclosed principal or not.’ (Keighley, Maxsted & Co v Durant [1901] AC 240 (Sealy and Hooley, pp.140, 180)).

Lord Lloyd (Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199 (Sealy and Hooley, pp.179-80)) summarised the law:

(1) An undisclosed principal may sue and be sued on a contract made by an agent on his behalf, acting within the scope of his actual authority. (2) In entering into the contract, the agent must intend to act on the principal’s behalf. (3) The agent of an undisclosed principal may also sue and be sued on the contract. (4) Any defence which the third party may have against the agent is available against his principal. (5) The terms of the contract may, expressly or by implication, exclude the principal’s right to sue, and his liability to be sued. The contract itself, or the circumstances surrounding the contract, may show that the agent is the true and only principal.

Where the agent acts without authority the principal cannot sue or be sued on the contract. Ratification by the principal is not possible because the principal is not identified to the third party at the time of the act by the agent.

There may be difficulty in distinguishing between unidentified (i.e. where the existence of a principal is disclosed but not their identity) and undisclosed principals. Furthermore, where the existence of the principal is undisclosed the agent will always appear to contract as principal and it may be difficult to determine whether or not the ‘agent’ has actually contracted as principal (United Kingdom Mutual Steamship Assurance Association v Nevill [1887] 19 QBD 11).

A rule that allows an undisclosed principal to enforce the contract might tempt an agent to enter the transaction without having the actual authority of a principal but knowing that it will not be difficult to find one who is willing to concoct evidence of prior authorisation in the unlikely event that it is necessary to produce such evidence.

Activity 3.5What did Lord Lloyd (Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199) mean when he justified the doctrine of the undisclosed principal by reference to considerations of commercial convenience?

3.2.2 Excluding the application of the doctrineThe doctrine of undisclosed principal will not apply if:

the terms of the contract exclude the right of P to intervene. In Humble v Hunter [1848] 12 QB 310, the description in a contract of one party as ‘owner’ of a ship excluded the possibility of admitting evidence to show he was merely the agent for the true owner.

A does not intend to act as agent in the contract

T makes it clear that they wish to contract only with A and with no one else (but on this see the discussion of Said v Butt below).


P and A agree that A will not contract on behalf of P, but that A will act as principal in certain transactions (but see the discussion of commission agents and the consideration of the decision in Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676 in 2.2.3 above).

However, the courts are more likely than not to construe a contract so as to allow an undisclosed principal to intervene for the reasons put forward by Lord Lindley (Siu Yin Kwan v Eastern Insurance Co Ltd). So, for instance, the impact of the decision in Humble v Hunter was limited in Fred Drughorn Ltd v Rederiaktiebolaget Trans-Atlantic [1919] AC 203 (Sealy and Hooley, pp.182-83), where, although the agent signed as ‘charterer’, this did not preclude intervention in the contract by an undisclosed principal.

In practice, the courts have made it relatively difficult for the third party by requiring them to prove a negative. It is assumed that commercial parties are willing to contract with anyone, unless an expression of unwillingness can be proved (Teheran-Europe Co Ltd v ST Belton (Tractors) Ltd [1968] 2 QB 545, Diplock LJ). The difficulty of proving this negative can be seen in Siu Yin Kwan v Eastern Insurance Co Ltd. An insurance policy included a term to the effect that benefits under the policy could not be assigned (that is, they could not be transferred to another party). Nevertheless, the Privy Council did not think that this prevented the intervention of an undisclosed principal. On the other hand, there is the decision of the Court of Appeal in Talbot Underwriting Ltd v Nausch Hogan & Murray Inc (The Jascon 5) [2006] EWCA Civ 889. The owners of a vessel had agreed with a shipyard (S) to take out insurance cover in relation to potential losses of S. The insurers were not made aware of this agreement and the policy made no mention of S. The policy did, however, cover, ‘including Assured, interest of Mortgagees (and notices of Assignment in respect hereof), Loss Payees, Additional Assureds…’ The Court concluded that S could not intervene in the contract as an undisclosed principal. The fact that the policy made no mention of S was taken as a positive indication that the insurer was not willing to contract with them: the insurers knew the vessel was in S’s yard and so might suffer damage for which S might be liable, so the fact that S was not referred to either by name or within a general category of shipyards, led to the conclusion that there had been no intention to cover S.

Nevertheless, it may be the clear intention of T to deal only with A and not with any other party, for example, where A possesses certain skills or where personal relationships had been developed in the course of earlier work upon which the present transaction builds (Rolls-Royce Power Engineering plc & Anor v Ricardo Consulting Engineers Ltd [2003] EWHC 2871 (Sealy and Hooley, pp.186-89)). In such cases, the contract is between T and A.

Difficulty has been caused by cases in which the objection of the third party is to the personality of the undisclosed principal. In Said v Butt [1920] 3 KB 497 (Sealy and Hooley, pp.184-85), a theatre critic knew the management of a particular theatre would not sell him a ticket because of articles he had written. He obtained a ticket through an agent. It was held that the theatre could prevent the principal from entering the theatre. McCardie J said that the critic could not assert a right as an undisclosed principal since, as he knew, the theatre was not willing to contract with him. The case is unusual. The intervention of the principal in the contract was opposed on the grounds of his personal defects; normally, the issue has been whether the personal attributes of the ‘agent’ are such that the principal intends only to deal with them.

The result in Dyster v Randall & Sons [1926] Ch 932 (Sealy and Hooley, pp.185-86) is more satisfactory. Here a developer, knowing that a landowner would not sell to him, bought through an agent. In the course of his judgment Lawrence J agreed with much of what had been said by McCardie J, nevertheless, he ordered specific performance. He remarked that, ‘mere non-disclosure as to the person actually entitled to the benefit of a contract…does not amount to misrepresentation, even though the contracting party knows that, if the disclosure were made, the other party would not enter into the contract’. It would seem that the courts favour this approach, particularly where commercial parties are involved. In Nash v Dix [1898] 78 LT 445, it was concluded that the third party had contracted with someone acting as principal and not as agent. In


that case, T did not wish to sell a chapel to a Roman Catholic committee. X purchased the chapel and resold to the committee. It was held that X had acted as principal in the purchased from T; indeed the evidence revealed that he had made a profit on the resale.

Activity 3.6Acme Co contracts to buy goods from Ecma Co. The price is agreed at £100. The parties also agree that Acme can set-off against payment a debt of £50 owed to it by Ecma. Mace Co now seeks to intervene in the contract by arguing that Ecma acted as its agent.

Advise Acme.

3.2.3 Settlement by the principal paying the agentWhat happens if the agent buys on behalf of an undisclosed principal and the principal pays the agent, but the agent fails to pay the third party? In Armstrong v Stokes [1872] LR 7 QB 598 (Sealy and Hooley, pp.199-200), a seller gave credit to A, who sometimes dealt as principal and sometimes as agent. The seller did not inquire whether on this occasion A was acting as principal or agent. Before the existence of the principal was disclosed the principal paid the purchase price for the goods to A, but A failed to pay the seller. Blackburn J rejected the application of Heald v Kenworthy [1855] 10 Exch 739 (see 3.1.2) because it would cause ‘intolerable hardship’, and concluded that the seller could not sue the principal for the debt.

In support of the decision it can be argued that the third party did not have in mind the creditworthiness of the principal, but only that of the agent. Nevertheless, in Irvine & Co v Watson & Sons [1880] 5 QBD 414 (Sealy and Hooley, pp.152-54), the Court of Appeal questioned the decision in Armstrong and even doubted whether it was correct. Brett LJ remarked:

Probably their decision means this, that, when the seller deals with the agent as sole principal and the nature of the agent’s business is such that the buyer ought to believe that the seller has so dealt, in such a case it would be unjust to allow the seller to recover from the principal after he paid the agent.

3.2.4 Defences available to the third partyThe general rule is that an undisclosed principal can enforce the contract on the same terms as the agent. This means that the third party can raise those defences that accrued against the agent up to the point that the principal intervened. The third party can, therefore, plead that the debt has been settled by the third party having paid the agent, or can use set-off (Borries v The Imperial Ottoman Bank [1873] LR 9 CP 38). In essence, set-off allows one contracting party to deduct from a payment due a debt owed by the other party – and in some cases may do so even though the debt owed to it does not arise out of the contract but out of another relationship between the parties. Moreover, even if set-off is not available, a court may grant a stay of execution of the judgment on a claim until the cross-claim has been resolved where injustice would otherwise result. Set-off may be of particular significance where one party becomes insolvent. For example, X owes Y £100 and Y owes X £50; if Y becomes insolvent, the standard position is that X must pay £100 to the liquidator of Y (who administers the assets of Y) and can only prove in Y’s liquidation for £50, which it is unlikely to receive; if, however, set-off is available X will only pay £50 because it will deduct the £50 owed by Y from the £100 owed to Y. Set-off is a complex area of law, which is beyond this course, although students should be aware of its general nature, as set out here.

The third party may only raise defences where they believed the agent was acting as principal in the transaction. In particular, the defences are not available where the third party was unconcerned as to the party with whom they were contracting (Cooke & Sons v Eshelby [1887] 12 App Cas 271 (Sealy and Hooley, pp.195-97)). There are some difficulties with this principle. The reasoning appears to be that the third party


can only use the defences if the principal was estopped from denying their availability, but this requires some representation by the principal to the third party and the very fact of the principal being undisclosed means there will be no such representation other than from the agent. Indeed, as has been seen, the assumption is that contracting parties have no interest in the identity of the other party.

Activity 3.7A, who owes T £1,000, enters into a contract for the sale of goods to T for £5,000 without disclosing that they are acting as agent for P.

T is aware that A sometimes contracts as principal and sometimes as agent, but on this occasion makes no enquiry as to whether A is acting as agent. Can T set off the debt owed by A?

3.2.6 Merger and electionOnce the principal is disclosed they can sue or be sued, but the third party can elect to hold either the principal or the agent liable on the contract (Clarkson, Booker Ltd v Andjel [1964] 2 QB 775 (Sealy and Hooley, pp.191-94)). The courts look for an unequivocal act that shows the third party has elected to proceed against either the principal or the agent. The institution of proceedings constitutes evidence of an election, but this can be rebutted. In determining whether there has been an election, it must be asked if the third party had full knowledge of the relevant facts.

If judgment is obtained against one of the parties, this amounts to merger, which precludes later action against the other party. This is not election because the third party may have obtained judgment in ignorance of the existence of the principal and, therefore, cannot have elected.

Study pack readings ‘Undisclosed principles in contract’ by A.L. Goodhart and C.L. Hamson.

‘Practical problems of the undisclosed principle doctrine’ by F.M.B. Reynolds.

Summary Where an agent, who was acting within the scope of their actual authority, enters into a contract on behalf of an undisclosed principal, the principal or agent may sue or be sued on the contract. The doctrine of the undisclosed principal has been justified on the grounds of commercial convenience, the argument being that in commercial contracts it is usually a matter of no importance to the parties whether or not there is an undisclosed principal.

3.3 Relationship between principal and agent

This area is, typically, included in works on commercial law. However, it will not be discussed in any great detail here as this subject guide focuses on transactions involving the sale of goods by way of trade. It is, therefore, concerned with the external relationship between a buyer and seller: the way an agent connects buyer to seller. As a result, the internal relationship between principal and agent is not covered in depth and students will not be expected to have a detailed knowledge of this area, although it is important to have a broad understanding of what is involved.

Those who wish to do so can read about this area in Sealy and Hooley, Chapter 6; Bradgate, Chapter 6. See also Tettenborn, A. ‘Principals, sub-agents and accountability’ (1999) 115 LQR 655, where Professor Tettenborn discusses the liability of a sub-agent (someone to whom the agent has delegated) to the principal.


3.3.1 Duties owed by agent to principalThese can be summarised as follows:

1 Duties imposed by the terms of the agency agreementThe agent must obey the principal’s reasonable instructions and act within actual authority. The agent must perform their duties with reasonable care and skill.

2 Duty not to delegate without the authority of the principal

3 Fiduciary dutiesThe agent is, usually, a fiduciary. This is a strict duty (Imageview Management Ltd v Kelvin Jack [2009] EWCA Civ 63) requiring the agent to perform with honesty and good faith for the benefit of the principal. Among other things, the agent must avoid conflicts between the interests of different principals for whom the agent is acting, must not use the agency as a means of furthering the agent’s own interests and must render accounts of dealings on behalf of the principal. The precise nature of the fiduciary duties owed by an agent to a principal will depend on the terms of their contractual relationship. It is possible to narrow the range of duties, although not to remove the core obligations of honesty and good faith (Armitage v Nurse [1998] Ch. 241; Bristol and West Building Society v Mothew [1998] Ch 1).

The decision in JD Wetherspoon Plc v Van de Berg & Co Ltd [2007] EWHC 1044 (Ch) discusses the agent’s liability for breach of fiduciary duty. Among other things, the court said that, while the principal cannot base a claim in the tort of deceit on the allegation that the agent had deliberately misled a third party, an agent who withheld information from the principal could be in breach of its fiduciary duty. Employees of the agent may also owe a fiduciary duty to the principal, even though there is no contractual relationship between the employee and the principal, and the same may be true of sub-agents (Markel International Insurance Co Ltd v Surety Guarantee Consultants Ltd [2008] EWHC 1135 (Comm), affirmed [2009] EWCA Civ 790). The fiduciary obligations may survive the termination of the agency (Connolly v Brown [2006] CSOH 187).

The agent’s liability for breach of contract or breach of fiduciary duty (other than the core obligations) can be limited or excluded. This exclusion or limitation will not remove liability for fraud and it may be subject to the reasonableness test under the Unfair Contract Terms Act 1977.

If the agent is a commercial agent within the provisions of the Commercial Agents (Council Directive) Regulations 1993 (see 3.3.4 below), certain obligations cannot be excluded or limited: the obligation to look after the principal’s interests and act dutifully and in good faith, and, in particular, the duty to make proper efforts to negotiate transactions, to communicate relevant information and to comply with reasonable instructions. (Regulations 3 and 5.)

3.3.2 Duties owed by principal to agent The duties owed to the agent have traditionally been determined by the terms of the agency contract. The agent has a right:

to the agreed remuneration (if any) where they have undertaken the tasks stipulated in the agency contract

to be reimbursed for expenses that have been agreed or are reasonable

to be indemnified against liabilities incurred in performing duties under the agency contract, but not for liabilities (or expenses) incurred when acting in excess of authority, unless the principal has ratified.

There is an implied promise that the principal will not undermine the agency contract: e.g. they will provide a sufficient quantity of goods to keep the agent’s customers reasonably satisfied (Turner v Steinhoff UK Furniture Ltd [2006] Eu LR 50 (County Court)).


3.3.3 Termination of the agencyThe agency will, usually, be terminated by:

completion of the task for which the agent was appointed or the expiry of the period of time for which the agent was appointed

agreement

revocation by the principal, unless the agency is irrevocable

death, or insanity of the principal or agent

winding-up or dissolution, where the principal or agent is a company

insolvency of the principal or, possibly, the agent.

3.3.4 Commercial Agents RegulationsThe Commercial Agents (Council Directive) Regulations 1993 (as amended) are part of the broader attempt to harmonise commercial law across the European Union (Sealy and Hooley, pp.105-8).

Regulation of agent-principal relations is more common in other countries than in the United Kingdom. In the UK, the focus has been on protecting the principal by placing duties on the agent and by subjecting particular types of agent to statutory regulation (e.g. under the Financial Services and Markets Act 2000). Elsewhere in Europe, there has been an awareness of the need to protect the agent. One major concern was that, having built up business, the agent’s principal might dispense with their services and deal directly with the clients. The 1993 regulations seek to provide commercial agents with a degree of protection similar to that enjoyed by employees.

The regulations cover commercial agents. Under reg. 2(1) a commercial agent is a self-employed intermediary (including a company, but not an employee of the principal, nor someone in business as a principal) with a continuing authority to negotiate (see Parks v Esso Petroleum Co Ltd [2000] Tr LR 232), or to negotiate and conclude, the sale or purchase of goods on behalf of the principal (see also the schedule to the regulations). Someone whose agency activities are secondary is not a commercial agent: secondary is defined in schedules to regs. 2(3)-(4) (see Tamarind International v Eastern Natural Gas (Retail) Ltd [2000] Eur LR 709). Estate agents are not commercial agents because they merely introduce principals and do not negotiate and are not involved in the sale or purchase of goods. Whether or not someone is a commercial agent depends on the particular circumstances of the relationship between the parties (see Mercantile International Group plc v Chuan Soon Huat Industrial Group Ltd [2002] EWCA Civ 288).

The commercial agent’s duty to the principal is to act ‘dutifully and in good faith’ (reg. 3). This would seem to mirror the pre-regulation requirements under English law. The agent is required to comply with the principal’s reasonable instructions, to make proper efforts in negotiations on the principal’s behalf, and to communicate with the principal.

The principal is obligated to act dutifully and in good faith towards the agent and must, in particular, provide documentation and information required for the agent to perform his or her functions, give reasonable notice of a downturn in business, and keep the agent informed as to the conclusion (or not) of transactions. In determining the content of the principal’s duty of good faith a balance is struck between the interests of the agent and the business interests of the principal, and to show a breach of the duty of good faith it is necessary to prove malice or bad faith (Simpson v Grant & Bowman Ltd [2006] Eu LR 933). The regulations set out the agent’s entitlement to remuneration. They also stipulate the circumstances in which the agency terminates and rights to notice and compensation and/or indemnity.

Significantly, neither the agent nor the principal can contract out of their obligations.


Sample examination questionAgatha is appointed by Toytoys Ltd to act as its agent in the purchase of toys, which will be sold through its shops. Agatha is instructed to obtain the consent of the company’s board of directors before making any purchase above £10,000. Agatha has undertaken various actions.

i. Christie, a toy manufacturer, contacts Agatha offering to sell a consignment of toys. Christie is in financial difficulties and, therefore, offers the toys for £30,000, which represents a substantial discount on the normal price, but Christie requires an immediate decision. Agatha says, ‘I don’t really have the authority for such a large transaction, but the board usually backs my opinion on such matters, especially in an emergency like this.’ Agatha, therefore, agrees to buy on behalf of Toytoys. The next day, Christie receives a better offer for the toys from another toy retailer. Christie telephones Agatha and says he is withdrawing from the deal. That afternoon, the board of directors of Toytoys decides it wishes to go ahead with the purchase from Christie.

ii. Agatha is offered toys for £15,000 by Dan. Dan knows Agatha does not have the authority to conclude the deal and so suggests that she seek such authority from the board of directors of Toytoys. The next day, Agatha tells Dan that she has been given the necessary authority. The deal is concluded. In fact, the meeting of the board of directors had been postponed because of illness, and Agatha, who was concerned about the possibility of losing the deal and convinced that the board would give its approval, had decided to lie to Dan. The board of directors later decides it does not wish to proceed with the purchase from Dan.

iii. Esmond, who is a toy manufacturer, knows that Agatha works as an agent for several companies, including Toytoys. Agatha is aware that Esmond has had serious problems in the past with Toytoys over its alleged failure to pay for goods on time and that because of this Esmond has made it clear that he does not want to trade with Toytoys. Agatha enters into a deal with Esmond. Later, Esmond discovers that Agatha is acting as agent for Toytoys and he refuses to continue with the deal.

Advise Toytoys as to its rights and obligations in relation to Christie, Dan and Esmond.


The best approach to a problem question is also the most obvious, work through from the first sentence to the last. Too often students ignore this advice and plunge into the middle of a question.

Identify the factual issues and then the applicable law. Set out and discuss the legal principles you think are relevant before trying to apply them.

i. The key point here is the statement by Agatha that she does not have authority to undertake the transaction. Moreover, when she says that ‘the board usually backs my opinion’, even if this is true, it amounts to an admission that sometimes the board does not back her opinion. It would seem, therefore, that when Agatha ‘agrees to buy on behalf of Toytoys’ that is not what is happening. Christie is aware that Agatha has no authority to accept an offer and that such acceptance can only be made by the board of directors. If this is the case, there is no agreement for the board to ratify because ratification requires the agent to purport to act for the principal, which Agatha seems not to be doing. It is worth just noting that, in view of the statements about her actual authority, Agatha does not have apparent authority, implied actual authority and Watteau v Fenwick does not apply, and there is no agency of necessity. Finally, since the question asks candidates to advise Toytoys as to its rights and obligations in relation to Christie, discussion of the obligations owed by Agatha is irrelevant.


ii. A good answer would focus on a discussion of the contrasting decisions in First Energy Ltd v Hungarian International Bank Ltd and Armagas Ltd v Mundogas SA. What is the distinction between these cases? What did the manager in First Energy have apparent authority to do? Which of these cases is closer to the facts in the problem? Again, discussion of Agatha’s liabilities is not required by the question.

iii. Esmond is not aware that Agatha is acting as agent for Toytoys, but has expressed his desire not to trade with that company. Do not restrict the discussion to Said v Butt. A good answer would consider whether that decision is the leading authority in light of cases such as Dyster v Randall & Sons, Nash v Dix, and, in particular, Siu Yin Kwan v Eastern Insurance Co Ltd. The application of these cases to this situation is made even more likely by the fact that Esmond showed no interest in asking Agatha for whom she was acting. This assumes that there is an undisclosed agency. The best students will discuss whether this is an example of an undisclosed agency or whether it is disclosed agency where the principal is unidentified, since we are told that Esmond knows Agatha acts as an agent.


Reflect and review







Ready to move on


Need to study again

I can explain the rights and obligations owed by the principal and by the agent to the third party.

I can explain the rights and obligations owed by the third party to the principal and to the agent.

I can outline the rights and obligations arising between the principal and the agent.


Must revise

Revision done

3.1 Relationship with third party: disclosed principal

3.2 Relationship with third party: undisclosed principal

3.3 Relationship between principal and agent

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52

4.1 The Sale of Goods Act . . . . . . . . . . . . . . . . . . . . . . . . . . .53

4.2 The scope of the Act . . . . . . . . . . . . . . . . . . . . . . . . . . . .55

4.3 What is a contract of sale of goods? . . . . . . . . . . . . . . . . . . . .55

4.4 The sale contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58

4.5 ‘Transfers or agrees to transfer the property’ . . . . . . . . . . . . . . . .60

4.6 Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69

4.7 Perishing of goods and frustration of contract . . . . . . . . . . . . . . .70

4.8 Transfer of title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72


4 Sale of goods: contract, property and risk


Introduction

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

In this chapter we look at the Sale of Goods Act, the definition of a sale contract, the rules on the passing of property and risk, and transfer of title. Chapter 5 considers delivery and acceptance of the goods and the implied terms in a sale contract. Chapter 6 deals with the remedies available to the parties where there has been a breach of the contract.

It is worth noting that in some aspects this Act distinguishes between consumer and non-consumer sale contracts. This part of the course concentrates on the latter – that is, on sales between business people.

Please note: the Sale of Goods Act 1979 is referred to throughout these chapters as ‘the Act’ or ‘SGA’. References to sections from the Act are merely noted by their section number: for example, ‘s.14(1)’ refers to section 14(1), Sale of Goods Act 1979.


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

analyse the components of the definition of a contract of sale

explain the circumstances in which property in goods is passed

identify how risk is passed

understand the nemo dat rule

discuss and illustrate the exceptions to the nemo dat rule.

Essential readingThe main reading is Sealy and Hooley, but you should be aware that a number of books on contracts of sale are available and are worth consulting.

For the issues raised in this chapter of the subject guide you can also consult

Bradgate, pp.219-44, 365-437.

Adams, J.N. and H. MacQueen Atiyah’s sale of goods. (London: Longmans, 2010) [ISBN 9781405859530] (referred to as ‘Atiyah’).

Commercial law Chapter 4 Sale of goods: contract, property and risk page 53

4.1 The Sale of Goods Act

4.1.1 The ActThe original Sale of Goods Act 1893 was an attempt to codify the common law on sale contracts. In addition to the United Kingdom, it was adopted with some modifications in many jurisdictions of the then Commonwealth of Nations. As a code, it necessarily reflected the sort of cases that came before the courts in the nineteenth century, which were mainly concerned with agriculture products and trading rather than goods bought for consumption. By the late twentieth century there had emerged a recognition that principles derived from commercial sales might not serve the needs of consumers. In providing greater protection for the consumer, the Sale of Goods Act 1979 (as amended) and other legislation, such as the Unfair Contract Terms Act 1977, became part of a shift from the general principle of caveat emptor (buyer beware) – according to which it was for the buyer to ensure goods did not suffer from any defects (see s.14(1), discussed in 5.5 below) – to a position where much of the burden has been shifted on to the seller to ensure that goods being sold do not suffer from certain types of defects, or that the buyer is made aware of such defects before the sale. At the same time, in the area of commercial sales the law has given some support to the seller. For example, ss.15A and 30(2A)-(2B) mean that the non-consumer buyer cannot reject defective goods or a delivery of an incorrect quantity of goods where the breach is so slight as to make rejection unreasonable.

In spite of the development of distinctions between the law applying to commercial (business-to-business) sales and applying to consumer sales (business-to-private-buyer), the rules remain mixed together in the same legislation: the SGA and related statutes, such as the Unfair Contract Terms Act 1977. This has led to confusion and calls for separate codes for the different types of sale.

4.1.2 Interpreting the Sale of Goods Act


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

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

I think the proper course is in the first instance to examine the language of the statute and to ask what is its rational meaning, uninfluenced by any considerations derived from the previous state of the law, and not to start with inquiring how the law previously stood, and then, assuming that it was probably intended to leave it unaltered, to see if the words of the enactment will bear an interpretation in conformity with this view. (Bank of England v Vagliano Brothers [1891] AC 107)

Atkin LJ confirmed that this was the correct approach to the SGA: ‘Inasmuch as we are now bound by the plain language of the code I do not think that decisions in cases before 1893 are of much value’ (Re Wait [1927] 1 Ch 606 (Sealy and Hooley, pp.266-67)). Yet, what this means is not always clear. Indeed, Atkin LJ followed the statement quoted above by referring to two pre-1893 cases. In Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC 454, Lord Upjohn explained, ‘Your Lordships were properly


referred to authorities in the nineteenth century, for section 14(2) only put the common law as it had been established into a statutory code.’ (Also Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd’s Rep 240 (Sealy and Hooley, pp.342-44); and Cehave NV v Bremer Handelsgessellschaft mbH, The Hansa Nord [1976] QB 44.)

Since the Act was passed in 1893 there has been a large number of cases in which its meaning has been explored, so it is increasingly difficult for a court to go back to the words of the statute without also taking into account later case law. The words of Lord Herschell should now be understood in light of the remarks of Lord Diplock (Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441 at 501-02). He drew attention to the danger of not allowing the law to develop and so restrict the freedom of the parties to engage in more sophisticated agreements than were envisaged by the courts in the nineteenth century. He said,

Because of the source of the rules stated in the Sale of Goods Act 1893 the classification adopted is by reference to the promises made in relatively simple types of contracts for the sale of goods which were commonly made in the nineteenth century and had been the subject of judicial decision before 1893. But although the language in which the rules are expressed is appropriate to these simple types of contracts, it has to be applied today to promises made in much more complicated contracts which cannot be readily allotted to any single class of contract which appears to be primarily envisaged by a particular section or subsection of the code. Unless the Sale of Goods Act 1893 is to be allowed to fossilise the law and to restrict the freedom of choice of parties to contracts for the sale of goods to make agreements which take account of advances in technology and changes in the way in which business is carried on today, the provisions set out in the various sections and subsections of the code ought not to be construed so narrowly as to force upon parties to contracts for the sale of goods promises and consequences different from what they must reasonably have intended. They should be treated rather as illustrations of the application to simple types of contract of general principles for ascertaining the common intention of the parties as to their mutual promises and their consequences, which ought to be applied by analogy in cases arising out of contracts which do not appear to have been within the immediate contemplation of the draftsman of the Act in 1893. My Lords, since I believe that the basic principle of the English common law of contract, including that part of it which is codified in the Sale of Goods Act 1893, is to give effect to the common intention of the parties as to their mutual promises in the sense that I have just described, I prefer to deal with each appeal by considering first the transaction between the buyer and the seller in the light of common sense and good faith in business, before examining the particular provisions of the code upon which the parties rely.

Study pack reading Extract from Ashington Piggeries Ltd v Christopher Hill Ltd.

As against the codification project of the 1893 Act, the objective of the Sale of Goods Act 1979 was to consolidate the various pieces of the legislation, including the 1893 Act, which had been passed on this subject. The approach taken to the interpretation of a consolidating Act is that it should be given its natural meaning, although it is presumed that the intention is to bring together all the law and not to alter it. Potter LJ explained (Stevenson v Rogers [1999] QB 1028):

The [Sale of Goods] Act of 1979 forms a single code; however, that is upon the basis simply that it consolidates and enacts within one statute and without material amendment a number of disparate statutes previously governing the field of sale of goods. While, in the first instance, a consolidating Act is to be construed in the same way as any other, if real doubt as to its legal meaning arises, its words are to be construed as if they remained in the earlier Act. Thus, in terms of the proper construction of its provisions, the Act of 1979 is not to be regarded as more than the sum of its parts.

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

(Note: in the remainder of this part of the subject guide, the terms ‘the Act’ or ‘SGA’ refer to the Sale of Goods Act 1979, as amended.)


Activity 4.1What problems are posed by Lord Diplock’s approach to interpreting the SGA?

Useful further reading Atiyah, pp.3-6.

4.2 The scope of the Act

Essential reading Sealy and Hooley, p.268.

The SGA defines a contract of sale of goods as:

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

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

The 1893 Act applied the same rules to all types of contract (with a few exceptions, such as auction sales: s.57 SGA), but the changes introduced by SGA and associated legislation have created significant distinctions in the rules governing different types of transactions. For instance, distinctions are made between commercial sales (business-to-business sales) and private sales (business/private (non-business) seller-to-private buyer): ss.1(3), 5, 6(2), 6(3) Unfair Contract Terms Act 1977; ss.14, 15(2)(C) SGA. As a result, the Act can no longer be regarded as a single code applying to all contracts of sale. This subject guide will focus on the rules relating to sales between businesses.

4.3 What is a contract of sale of goods?

Essential reading Sealy and Hooley, pp.267-93

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

There are, however, restrictions on this freedom. The sub-section does not allow the parties to vary the principles of contract law determining matters such as what constitutes a binding contract or the effect of misrepresentation and illegality. Furthermore, it is clear that certain provisions in the SGA cannot be varied, even though the Act does not expressly exclude this possibility. For example, the rule in s.16 that no property can pass in unascertained goods (see 4.5) or the rules that enable a third party to obtain good title to goods under ss.21-26 (see 4.8).

4.3.2 Transactions that are not salesThe Act applies only to sales of goods and not to other types of contracts dealing with goods. It is, therefore, worthwhile considering the distinction between these different contracts, although the courts have sought to apply similar rules to all of them (see also the Supply of Goods and Services Act 1982, which drew on the SGA with respect to contracts for the supply of services). Distinctions are not always easily made, but the general approach taken by the courts is to look at the substance of the transaction and not its form – in other words, is it a sale even though the parties may refer to it as something else?


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

BarterHere the consideration takes the form of goods or services and not money (which is required under the SGA: see 4.4.2). Where goods are transferred to the seller in part exchange by the buyer (e.g. A agrees to sell to B a car, which is priced at £5000, for £2000 plus B’s existing car), this may be construed as two sales – B buys A’s car for £5000 and A buys B’s car for £3000 (see Aldridge v Johnson (1857) 7 E & B 885).

Contract of bailmentThis is where goods are delivered to the bailee on terms requiring their return to the owner (the bailor) or to another party. Although the person holding the goods under such a contract has certain rights and obligations, there is no intention that property will pass to the bailee. There is, therefore, no bailment if the intention of the parties is that property passes to the other party, even if the terms of their agreement stipulate that on the occurrence of an event the property in the goods must be conveyed back to the original owner (South Australian Insurance Co v Randell (1869) LR 3 PC 101).

Security interestsWhere someone (the chargor) grants an interest in goods in favour of another (the chargee) as security for a loan or some other form of credit, the chargor retains property in the goods. The chargee does acquire a proprietary interest in the goods, and the charge will cease when the debt is paid (Sealy and Hooley, p.286-87). There are various ways in which a charge may be created in relation to goods: the owner may or may not hand possession of the goods or documents of title to the other party to secure the debt (pledge), or may transfer legal title to the goods to the creditor under terms that require the creditor to convey that title back to the debtor on payment of the debt. The creditor will have the right to sell if the debt is not paid. The Act does not apply to a transaction in the form of a sale that is intended to operate by way of security (s.62(4)).

Contract for work and materialsThis is a contract involving skill and labour as well as the transfer of property in goods, such as the painting of a portrait by an artist (Sealy and Hooley, pp.287-91). Where the work element can be separated from the goods, as where a gas fitter installs a new central heating boiler, one might be able to suggest there are two contracts, one for the labour (contract for work) and one for the boiler (contract of sale). The problem arises where the work done by the fitter is very defective and the householder wishes to reject the boiler. This may not be possible because the boiler is not defective and there is, therefore, no breach of the sale contract, only a breach of the contract for labour.

The courts will distinguish between a contract for sale and one for work and materials by looking at the substance, but this does not always supply a useful guide to where the line is drawn between them. Greer LJ thought the test involved determining if the skill is ‘only ancillary’ or if ‘the substance of the contract is the skill and experience of the artist in producing the picture.’ (Robinson v Graves [1935] 1 KB 579 (Sealy and Hooley, pp.289-90)). The distinction in that case was between the portrait painter and the maker of a set of dentures. It was concluded that in the latter situation there is a sale of goods because ‘the principal part of that which the parties are dealing with is the chattel which will come into existence when such skill as may be necessary to produce it has been applied’.

This makes it seem as though the distinction rests on an assessment of what is and is not skill or art. The test might be, ‘do the goods in question acquire the bulk of their value from the work applied in making them so that the goods are increased to an extent that substantially exceeds their value in a raw state?’ But this is too vague: dentures are made up from cheap raw materials and it is the process of forming these


into dentures that adds value. Moreover, such a general rule contradicts some of the things said in one leading case, Lee v Griffin [1861] 30 LJQB 591. The assumption that a contract must be in substance either a contract of sale or of work and materials may work well if there is a clear separation between the supply of goods and the performance of some service (such as fitting the goods), but may not be so easy where the work is inseparable from the goods (as in a painting or a restaurant meal) and leads to what often appear rather arbitrary designations of contracts. In truth, the judgments in Robinson v Graves were, perhaps, too loose to be able to discern any clear principle. Problems have arisen from attempts in some cases to transform a specific set of facts into a general rule so as to legitimise an outcome when really the distinction ‘depends on the particular nature of each individual contract’ (Lord Upjohn, Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC 454).

The significance of the distinctions between some of these contracts has diminished, although not entirely vanished. In Young & Marten Ltd v McManus Childs Ltd, the House of Lords took the view that, as far as possible, the same principles should be applied whether goods were supplied under a sale contract or a contract for work and materials (but contrast Lord Upjohn’s approach with that of Lord Wilberforce). This has been reinforced by the Supply of Goods and Services Act 1982, which implies terms with respect to the goods supplied that largely match those implied into a contract for the sale of goods. That Act also imposes on the supplier the duty to exercise reasonable care and skill in respect of the service that is supplied (Supply of Goods and Services Act 1982, s.13).

Agency contractsWhere A buys goods from T on behalf of P and P has authorised or later ratifies the purchase, there is an agency contract between P and A and a sale contract between P and T. Contrast this with the situation where A acts as a principal so that there is a sale contract between T and A and another between A and P. The test as to whether someone sells/buys as principal or agent is determined by the substance of the transaction (in essence, what did the parties intend) and not the form it took (e.g. the words used to describe the transaction). (See Chapter 2 above.)

Option to buyWhere X agrees to grant an option to Y to buy goods, this is an enforceable contract if supported by consideration, but it does not fall within the SGA until and unless Y exercises the option to buy (Helby v Matthews [1895] AC 471). A sale-or-return contract arises where X delivers goods on terms that allow Y to accept or reject them within a particular period of time. This is an option to buy because Y has a choice. While Y is considering whether to exercise this option there is a contract of bailment. The SGA does have provisions that apply to sale-or-return contracts, but, as will be seen, the offer of goods on such a basis does not mature into a sale contract unless accepted by the person to whom the offer is made (see 4.5).

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


Contract of hire-purchaseTypically, this is a means by which someone can buy goods by making payments over a period of time. However, it is not a sale because, while the intention is that the buyer will own the goods when all the payments have been made, the passing of property will only occur if the buyer chooses to exercise an option under the contract to that effect. There is no obligation on the buyer to exercise this option (Helby v Matthews [1895] AC 471 (Sealy and Hooley, pp.283-85)). Contrast this with the situation where the contract stipulates that property will pass at some specified time in the future, which will be an agreement to sell (Forthright Finance Ltd v Carlyle Finance Ltd [1997] 4 All ER 490 (Sealy and Hooley, p.285)). See the criticism of the distinction between hire-purchase and sale contracts made by Sealy and Hooley, p.286. Most hire-purchase contracts are regulated by legislation, especially the Hire-Purchase Act 1965 and the Consumer Credit Act 1974, and terms similar to those implied by the SGA apply by virtue of the Supply of Goods (Implied Terms) Act 1973, although significant differences remain.


SummaryA sale contract is defined by s.2(1) SGA. The components of that definition must be present so where there is no transfer of property it is not a sale. The importance of the distinctions between sale contracts and other types of contracts involving goods has been reduced – but has not entirely vanished – because, in so far as is possible, the same principles are applied to different types of contracts involving the supply of goods.

4.4 The sale contract

The components of the definition in s.2(1) (see 4.2, above) are examined in this section.

4.4.1 Sale or agreement to sellAs has been seen (4.2), the Act applies to both a sale and an agreement to sell. The word ‘sale’ includes both types of contract, and buyer/seller includes someone who has agreed to buy/sell (s.61(1)).

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

It is worth emphasising these points: the sale involves both a contract and the conveyance of title to goods, whereas the agreement to sell does not convey title, although it does include promises as to conveyance.

4.4.2 Price


The price must be in money, either paid or promised. This includes payment by cheque, credit card or other forms of money transfer. The price may be fixed in the contract (s.8(1)), or left to be determined in a manner agreed by the contract, or by some measurement (e.g. weight), or by a third party (see s.9). If the parties have left the price to be agreed upon later by the parties, there is usually no contract on the grounds of uncertainty, unless the court can infer an intention that a reasonable price


is to be paid (s.8(2)). If the contract stipulates that the price is to be fixed by a third party and that party fails to act, neither party has any remedy under the contract, except, perhaps, the return of goods or money transferred – the courts cannot intervene to appoint another person to fix the price or to set a reasonable price.

Activity 4.2a. Jake wishes to buy a new car priced at £7,000 from Mary, a dealer. Mary agrees to

take Jake’s old car and to reduce the price of the new car by £1,000. How would you characterise the transaction?

b. If goods are sold for 10 pence plus three wrappers from a chocolate bar, does the transaction fall within SGA?


4.4.3 ‘Goods’


The word ‘goods’ in s.2(1) includes:

…all personal chattels other than things in action and money… and in particular ‘goods’ includes emblements,† industrial growing crops, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale; and includes an undivided share in goods (s.61(1)).

The Act does not apply to land (real property), nor shares and cheques (choses or things in action) or bank notes (money). The sale of bank notes or coins, which are legal tender (that is, can be used in the settlement of debts) but also have a value to collectors above their face value, may fall within the Act if the parties intend their transaction to be on the latter basis (Moss v Hancock [1899] 2 QB 111).

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

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

The distinction between goods and land is not easily made. The Act does cover crops that are attached to the land, although these are also land within the meaning of the Law of Property Act 1925, s.205 (Kursell v Timber Operators and Contractors Ltd [1927] 1 KB 298 (Sealy and Hooley, pp.273-74)). Whether goods have been affixed to – and so become part of – land often depends partly on the degree of annexation (how easily can the goods be detached?) and partly on the purpose of annexation (what was the intention of the parties in attaching the goods to the land?): so bricks are goods that become land when formed into a wall on land. A building is land, but can become goods by demolition or detachment from the land. Therefore, if the owner of land agrees to demolish a building and sell the materials, this is a contract of sale of goods. Things attached to or forming part of the land – buildings, fixtures, crops, minerals and soil – which are agreed to be severed before sale or under the contract of sale, are declared to be goods by s.61(1).

† Emblement = ‘the profits of sown land’, particularly annually harvested grass, grain or fruit, etc.


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

Under s.61(1) ‘goods’ includes an undivided share in goods so that a contract of sale includes the sale of part of a larger, undivided bulk of goods, such as a one-half share in a horse or boat. We will discover the significance of this when we come to discuss the passing of property in goods.

4.5 ‘Transfers or agrees to transfer the property’

4.5.1 Property

Essential reading Sealy and Hooley, pp.55-92, 272-78.

Study pack reading ‘The concepts of “property”, “title” and “owner” used in the Sale of Goods Act

1893’ by G. Battersby and A.D. Preston.

‘A reconsideration of “property” and “title” in the Sale of Goods Act’ byG. Battersby.

While the price is the benefit received by the seller, the buyer receives both the goods and property in the goods. If the goods, which were the subject of the sale contract, are in the possession of the seller and the seller becomes insolvent, the question of who owns the goods – or, in the words of the Act, has property in them – determines whether the other party joins the ordinary creditors or is able to claim the goods themselves. In addition, since risk usually runs with property (s.20(1); 4.6 below), who has property will often settle the question of who bears the loss if goods are damaged or destroyed.

The concept of property in English law is elusive and there is not sufficient space in this subject guide to consider all its nuances. Nevertheless, it is worth making one or two observations. A property right is the connection between an individual and a thing:

The touchstone of a property right is its universality: it can be asserted against the world at large and not, for example, only against another individual such as the contracting partner. If, under a contract of sale, I acquire the ownership of a chattel, my property right to the chattel may be asserted not just against the seller but against the whole world. (Bridge, M. Personal Property Law. (Oxford: Oxford University Press, 2002), p.12.

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

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


What is the ‘property’ that is being transferred? According to s.61(1) it is ‘the general property in goods, and not merely special property’. This means the seller is transferring, or agreeing to transfer, the absolute legal interest in the goods, so the transfer of something less than the seller’s full legal interest does not constitute a sale. For example, bailment does not come within the SGA because it does not transfer the owner’s absolute legal interest in the goods, it just transfers possession. But absolute legal interest does not mean the transfer of perfect legal title. Indeed, various parts of the Act are concerned with situations in which the seller has a defective title or no title at all (for example, ss.12(3) and 21-26, see 4.7 below).

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

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

Future goods Future goods are to be manufactured or acquired by the seller after the making of the contract (s.5(1)). So, if the goods do not yet exist or exist but are the property of someone other than the seller, they are future goods: for example, the sale by Jake to Pugwash of a Bentley motor car is a sale of future goods if Jake does not own the car at the time of the contract (Varley v Whipp [1900] 1 QB 513). There cannot be a sale of future goods, only an agreement to sell (s.5(3)), but this still falls within the SGA (s.2).

Specific or unascertained goods Existing or future goods will also be specific or unascertained goods. The significance is that property will not pass where the goods are not ascertained (s.16; but see s.20A, discussed in 4.5.10 below) and a court cannot make an order for specific performance in respect of unascertained goods (s.52). The distinction between specific and unascertained goods depends on when they are identified:

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

If they are not identified at the time of the contract they are unascertained goods.

The sale of ‘my Bentley’ is a sale of existing and specific goods if I only have one Bentley. I cannot perform the contract by substituting another Bentley, even if it has precisely the same specifications.

Typically, future goods will be unascertained. If the buyer agrees to buy a new Bentley from a dealer who does not have what is required in stock, this is a sale of future and unascertained goods. On the other hand, if the buyer agrees to buy from the dealer a particular Bentley, which at the time of the contract is owned by another person, this is a sale of future goods (because the seller has not acquired them) and specific goods (because they are identified at the time of the contract) (Varley v Whipp [1900] 1 QB 513).

While goods are unascertained no property in them can pass to the buyer and the buyer has, therefore, only a contractual right against the seller and has no rights in any goods. Property can only pass when the goods become ascertained. Although the rules on passing of property are discussed in more detail in the next section, it is worth noting one of the problems with the rule that property cannot pass in unascertained goods. In Re Wait [1927] 1 Ch 606 (Sealy and Hooley, p.266-67), 500 tons of wheat were sold from a cargo of 1,000 tons that was on board a ship, Challenger. When the seller went into liquidation, the court held that the sale was of unascertained goods and so property had not passed to the buyer at the time of the contract. The buyer could not, therefore, claim the goods and merely joined the other general creditors. Similarly,


in Goldcorp Exchange Ltd [1995] 1 AC 74, customers of a company purchased bullion for future delivery on terms that they were buying ‘non-allocated metal’, which meant it was not set aside but was stored as part of the company’s general stock. Under the agreement, an investor had the right to take physical delivery of bullion from that stock. The company became insolvent. The Privy Council held that the goods were unascertained and property had not passed because the company was free to decide what bullion to allocate to a particular investor.

There are three main categories of unascertained goods:

Generic goods, or goods referred to only as being of a particular kind or description: the sale of ‘100 tons of barley’.

Goods not yet in existence, which are to be manufactured or produced or acquired by the seller: the sale of a reaping machine owned by a third party at the time of sale.

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

Ascertained goodsWhere there is a contract for the sale of unascertained goods, once the goods are identified and connected by consent of the parties to the contract (‘appropriated’, see 4.5.8 below), they become ascertained goods.

Study pack reading Bridge, M. ‘Transfer of title’, Chapter 5 from Personal Property Law. (Oxford:

Oxford University Press, 2004) [ISBN 978-0199254767] pp.115-136.

Activity 4.3How would you categorise the following (put your answers into the grid).

a. 100 tons of wheat to be harvested from a particular field next summer.

b. A particular second-hand reaping machine owned by someone other than the seller.

c. A book ordered from an internet bookseller.

d. A bag of flour taken from the shelf in a supermarket by a customer.

Specific Unascertained

Existing

Future

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

Useful further reading Atiyah, pp.74-81, 305-310.

Bridge, M. Personal property law. (Oxford: Oxford University Press, 2002) [ISBN 0199254761] particularly, pp.12-15, 26-27, 28-31, 80-93.

Goode (2010), pp.28-50.

Merrett, L. ‘The importance of delivery and possession in the passing of title; [2008] CLJ 376.


4.5.3 Passing of property


The key principles relating to the passing of property in sales contracts are summarised below.

a. ‘The right of property and the right of possession are distinct from each other; the right of possession may be in one person, the right of property in another.’ (Tarling v Baxter [1827] 6 B & C 360 (Sealy and Hooley, p.303), Bayley J).

b. ‘Where there is a contract for the sale of unascertained goods no property in the goods is transferred to the buyer unless and until the goods are ascertained.’ (s.16) This is based on what Lord Mustill called ‘a priori common sense’, which ‘dictates that the buyer cannot acquire title until it is known to what goods the title relates’ (Goldcorp Exchange Ltd [1995] 1 AC 74). But this general principle is subject to an important exception in s.20A (discussed below).

c. Where the goods are specific or ascertained, property will pass when the parties ‘intend it to be transferred’ (s.17(1)). To determine their intention ‘regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case’ (s.17(2)). Property may still pass even though the time for payment or delivery has not arrived (but see the remarks of Diplock LJ quoted in section 4.5.4 below).

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

e. The courts have always rejected the idea that under a sale contract the buyer may acquire an equitable interest in the goods. Atkin LJ said in Re Wait [1927] 1 Ch 606 (see also Lord Brandon in Leigh v Sillavan Ltd v Aliakmon Shipping Co Ltd, The Aliakmon [1986] AC 785):

It would have been futile in a code intended for commercial men to have created an elaborate structure of rules dealing with rights at law, if at the same time it was intended to leave, subsisting with the legal rights, equitable rights inconsistent with, more extensive, and coming into existence earlier than the rights so carefully set out in the various sections of the code.

Nevertheless, Atkin LJ did go on to say that the provisions in the Act have:

…no relevance when one is considering rights, legal or equitable, which may come into existence dehors [outside] the contract for sale. A seller or a purchaser may, of course, create any equity he pleases by way of charge, equitable assignment or any other dealing with or disposition of goods, the subject matter of sale; and he may, of course, create such an equity as one of the terms expressed in the contract of sale.

The parties may, for example, agree in the sale contract that the goods are to be held by the seller on trust for the buyer. The parties must intend to create a trust and to limit the freedom of the seller to deal with the goods, and the goods must be clearly identified. An attempt to establish a trust in relation to unascertained goods would fail to satisfy the second of these criteria. See Re London Wine Co (Shippers) Ltd [1986] PCC 121 (Sealy and Hooley, pp.316-19); Goldcorp Exchange Ltd (in receivership) [1995] 1 AC 74). But see also Re Stapylton Fletcher Ltd [1995] 1 WLR 1181 (see 4.5.8 below).

Activity 4.4Why did the court not give full recognition to the apparent intention of the parties in Re Blyth Shipbuilding and Dry Docks Co Ltd [1926] Ch 494?

You are encouraged to practice your spoken English by making an oral answer in response to this activity.


4.5.4 Section 18, rule 1: goods in a deliverable stateWhere there is an unconditional contract for the sale of specific goods in a deliverable state the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment or the time of delivery, or both, be postponed.

In spite of its wording, Diplock LJ remarked of this rule: ‘the governing rule is in s.17, and in modern times very little is needed to give rise to the inference that property in specific goods is to pass only on delivery or payment’ (RV Ward Ltd v Bignall [1967] 1 QB 534).

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

Goods are ‘in a deliverable state’, ‘when they are in such a state that the buyer would under the contract be bound to take delivery of them’ (s.61(5)). In Underwood Ltd v Burgh Castle Brick & Cement [1922] 1 KB 123 (Sealy and Hooley, pp.327-28), a machine was attached to a factory floor and, therefore, was not in a ‘deliverable state’ until detached. It is only when the seller must do something that this rule may prevent property from passing and not if, for example, a contract term requires the buyer to detach the machine.

There is a difficulty with specific goods that are also future goods (such as the machine in Varley v Whipp [1900] 1 QB 513), which would seem to come within rule 1. This is resolved by s.5(3), which states that a contract to effect a present sale of future goods is treated as an agreement to sell goods so that property will not pass until the seller acquires title or the buyer acquires title through an exception to the nemo dat rule (Goode (2010), p.251. On the meaning of the nemo dat rule see section 4.8 below).

Activity 4.5A farmer agrees to sell all of the trees on his land. The trees are to be cut down a month after the agreement and payment is to be made at that time. At what point does the property in the trees pass?

4.5.5 Section 18, rule 2: goods not in deliverable stateWhere there is a contract for the sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them into a deliverable state, the property does not pass until the thing is done and the buyer has notice that it has been done.

This covers the situation where the goods are not in a deliverable state at the time of the contract and so property does not pass under rule 1, but they are later put into a deliverable state. Once the seller has undertaken the work necessary to render the goods deliverable, property will pass when the buyer has been given such notice as the contract specifies or, failing that, such notice as a reasonable person would require. The rule does not cover the situation where the contract requires the buyer to put the goods into a deliverable state and so in that situation property may pass, unless there is a contrary intention in the agreement.

4.5.6 Section 18, rule 3: price to be ascertainedIf the seller of specific goods in a deliverable state is required to carry out some procedure to ascertain the price, such as weighing or measuring, property will not pass until that has been done and the buyer notified. If the contract stipulates that someone other than the seller is to undertake this task, rule 3 will not apply and property will pass under rule 1 (Nanka-Bruce v Commonwealth Trust [1926] AC 77 (Sealy and Hooley, pp.331-32)).


4.5.7 Section 18, rule 4: sale or returnWhere goods are ‘delivered to the buyer on approval or sale or return’, property passes when the buyer:

signifies acceptance, or

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

retains the goods beyond the time fixed by the agreement for a decision without ‘giving notice of rejection’, or, if no time is fixed, retains the goods beyond a reasonable time (rule 4(b)).

This rule covers situations where goods are supplied on the understanding that the sale is dependent on the person in receipt of the goods adopting the transaction. Such agreements are common in certain trades and might be entered into because, for example, a retailer is uncertain about demand for a product (Atari Corporation (UK) Ltd v Electronics Boutique Stores (UK) Ltd [1998] QB 539). This arrangement must be distinguished from a contract of sale in which the seller retains property in the goods (see 6.4) or the buyer acquires property in the goods but there is a term allowing their return (Elphick v Barnes [1880] 5 CPD 321). In sale or return there is no contract or agreement to sell; there is only an offer by the ‘seller’, which the ‘buyer’ may accept or reject. Thus, Phillips LJ observed that ‘the notice of rejection referred to by the Act of 1979 is no more than the notice that an offeree can always give that a contractual offer is rejected’ (Atari Corporation (UK) Ltd v Electronics Boutique Stores (UK) Ltd).

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

The ‘buyer’ holds the goods under a contract of bailment. This means that the risk of damage to the goods remains with the ‘seller’, although the ‘buyer’ must take reasonable care of them.

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

Other issues that have caused difficulty in sale or return agreements have been: (a) what is meant by ‘an act adopting the transaction’? (b) what amounts to a reasonable time? (c) what constitutes a notice of rejection and what effect does it have?

a. What constitutes ‘an act adopting the transaction’? If an act indicates personal use by the ‘buyer’, which goes beyond what is contemplated by the arrangement, this might amount to ‘an act adopting the transaction’ (Poole v Smith’s Car Sales (Balham) Ltd [1962] 1 WLR 744 (Sealy and Hooley, pp.335-36). Also, Kirkham v Attenborough [1897] 1 QB 201).

b. What amounts to a reasonable time? This depends on the agreement and the nature of the goods (Poole v Smith’s Car Sales (Balham) Ltd [1962]).

c. What constitutes a notice of rejection and what effect does it have? Often contracts for sale or return do not address the issues of how the ‘buyer’ is to signify rejection of the goods, or what is the responsibility of the ‘buyer’ once the goods have been rejected. Subject to any agreement to the contrary, rejection can be notified in any form and does not require return of the goods, although the ‘buyer’ must make them available to the ‘seller’ within a reasonable period of time after rejection. Notice is only effective if given before property has passed, that is, before acceptance – after acceptance the buyer will have the normal remedies that any buyer under a sale contract would have if the goods are defective.

Activity 4.6a. Jake has expressed an interest in buying a particular horse owned by Mary for

£1000, if it is suitable for his young daughter to ride. Mary agrees that Jake can take the horse for 10 days in order to determine its suitability. After a week the horse becomes ill and dies. Is Jake liable for the price?

b. How might your answer to (a) have differed if Jake had used the horse himself on a number of occasions and had ridden it in a race?


4.5.8 Section 18, rule 5: unascertained goods and appropriationWhile rules 1 to 4 are concerned with specific goods, rule 5 concerns unascertained goods. No matter what the parties may wish, property does not pass ‘until the goods are ascertained’ (s.16, but see s.20A in 4.5.10 below). Once the goods are ascertained property passes when the parties intend (s.17). If no such intention can be determined, rule 5 applies.

Property in the goods passes to the buyer where (rule 5(1)):

there is a contract for the sale of unascertained goods or future goods by description, and

goods of that description and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with the assent of the seller (assent may be given before or after the appropriation).

The chief difficulty lies in the means by which goods are unconditionally appropriated.

Appropriation requires:

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

the assent of both parties.

(Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd’s Rep 240 (Sealy and Hooley, pp.342-44).)

The contract can specify what amounts to appropriation, but often the identification and assent will be by the seller physically taking the goods to the buyer and the buyer accepting them, or the buyer going to the seller and collecting the goods. It is not sufficient for the seller merely to label goods or to store them separately (unless this is specified in the contract) since this leaves the possibility of the seller changing their mind and substituting other goods. The seller must unconditionally appropriate the goods to the contract. This action is, usually, the last act of the seller, that is, delivery of the goods. This does not necessarily make matters straightforward because under the SGA the seller’s act of delivery is presumed to be merely making goods available for collection by the buyer (see section 5.2.2).

There are some troublesome cases. In Aldridge v Johnson [1857] 7 E & B 885, there was appropriation before delivery when the seller placed the goods in containers supplied by the buyer, even though the seller could have unpacked the goods and replaced them with other goods. Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd’s Rep 240, is more rigorous. There was no appropriation even though the seller packed the bicycles in crates marked with the buyer’s name. The only substantial distinction between this case and Aldridge is that in the latter the containers were supplied by the buyer, but that would not seem to go to the core of the matter, which should be that there is no appropriation until it is beyond the power of the seller to substitute goods. Yet, it might be that in Aldridge there was an implied term in the contract permitting the seller to appropriate by their act of loading the goods.

Handing goods to a carrier for transmission to the buyer, without reserving the right of disposal, may amount to unconditional appropriation by the seller (rule 5(2); Wardar’s (Import & Export) Co Ltd v W Norwood & Sons Ltd [1968] 2 QB 663 (Sealy and Hooley, pp.344-45)). Such an action is also presumed to constitute delivery (s.32(1); see 5.2.2 below).

If the seller attaches conditions to the appropriation, property will not pass even though the goods are ascertained. For example, if the contract stipulates that the seller retains property in the goods until the buyer has paid, property will only pass when the condition has been met (s.19 and see also 6.4 below).

Appropriation is only complete if the buyer signifies assent by, for instance, agreeing to take delivery of the goods. Unless the parties agree otherwise, the assent of the buyer does not have to take a particular form and can be implied. Where goods of the


correct quality and description are appropriated by the seller to the knowledge of the buyer, the buyer cannot delay the passing of property by inaction (Pignataro v Gilroy [1919] 1 KB 459 (Sealy and Hooley, pp.341-42)).

Activity 4.7Acme agrees to sell to Ecma 100 tons of wheat to be delivered on 31 August. On 31 August, Acme notifies Ecma that 100 tons of wheat have been set aside in Acme’s warehouse and urges them to collect the wheat. The wheat is stolen from the warehouse on 10 September. Advise Acme.

4.5.9 Section 18, rules 5(3) and 5(4): ascertainment by exhaustion Mustill J pointed out that ascertainment can be achieved by a method other than that in rule 5(1) (Karlshamns Oljefabriker v Eastport Navigation Corp: The Elafi [1981] 2 Lloyd’s Rep 679; Wait & James v Midland Bank [1926] 31 Com Cas 172 (Sealy and Hooley, pp.322-24)). All that is necessary is that the goods should be ascertained and the parties intend property to pass. Where there is a sale of part of a ship’s cargo, the goods can be ascertained where the cargo is reduced by prior deliveries to the amount for which the buyer contracted, or where a single buyer purchases the whole cargo in different lots, and the parties intend property to pass.

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

4.5.10 Section 20A: unidentified part of identified bulkRule 5(3) does not deal with the situation where the buyer has bought an unidentified part of a specified bulk and the rest of the bulk remains intact: for example, 500 tons of wheat from a cargo of 1,000 tons on board the MV Challenger (Re Wait [1927] 1 Ch 606). The goods are unascertained and property cannot pass (s.16). A buyer who has paid for the goods will merely rank among the unsecured creditors if the seller becomes insolvent. On the other hand, the buyer is not at risk if the goods are lost (although see 4.6 below). It makes no difference if two buyers together bought the entire 1,000 tons, although it is possible to create a tenancy in common. In Re Stapylton Fletcher Ltd [1995] 1 WLR 1181, wine was sold to customers and, although held by the seller, it was kept separately from the seller’s own wine. It was not possible to identify which customer owned which wine, but it was held that the customers were tenants in common: the wine was ascertained by the transfer from the merchant’s own stock to storage for the customers.

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

The buyer will be an owner in common of the bulk (unless the parties agree otherwise – s.20A(2)) if all the following circumstances are present.

There is a sale of ‘a specified quantity of unascertained goods’ that form part of a bulk. A specified quantity is ‘500 tons of wheat’ and not ‘half the cargo of wheat’. In the latter case the buyer does not come within s.20A, but might be a tenant in common at common law.

The bulk is identified in the contract or by subsequent agreement (s.20A(1)(a)). The bulk is ‘a mass or collection of goods of the same kind which (a) is contained in a defined space or area; and (b) is such that any goods in the bulk are interchangeable with any other goods therein of the same number or quantity’ (s.61(1)). Examples given by the Law Commission of a bulk included wheat on a named ship, oil in a specified tank, or a specified roll of carpet from which a particular length is to be cut.

The buyer has paid all or part of the price (s.20A(6)).

Note that s.16 still applies to those goods for which the buyer has not paid so that property in them cannot pass until they become ascertained.


The size of the buyer’s share of the bulk depends on the ratio that the quantity of goods paid for and due to the buyer bears to the bulk (s.20A(3)). This means that if the buyer has agreed to buy 100 litres of oil from a specified tank containing 1,000 litres and has paid, the buyer becomes a co-owner of the bulk in the ratio of 100:1,000 (in other words, the buyer’s share is 100 and the seller’s 900). If a second buyer pays for 100 litres and a third buyer pays for 800 litres the co-ownership shares are 100 (first buyer): 100 (second buyer): 800 (third buyer).

Where the bulk has diminished through, for example, natural wastage, or where the seller has sold more goods than are in the bulk, the total shares will exceed the size of the bulk. Here each co-owner will have the same interest in the reduced bulk (s.20A(4)). Taking our oil tank, if half of the bulk has been lost, each buyer will have a tenth of the reduced bulk. Goode (2010, p.281) suggests that where part of the bulk is not sold, any diminution of the bulk should be borne first by the seller.

Under s.20B(1), all the co-owners are deemed to consent to any disposition of the goods by a co-owner and a sale by a co-owner is a contract of sale of goods because ‘goods’ includes an undivided share in goods (s.61(1)), which is what a co-owner has under s.20B. This allows buyers to deal in goods while they are in transit. A co-owner, who receives no more than is due under the contract, is not liable to any other co-owner for taking delivery and is not liable to compensate where there is a shortfall in the delivery to another co-owner (s.20B(2), (3)). The disappointed co-owner will only have a remedy against the seller.

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

Activity 4.8a. Fred agrees to buy ‘all the hay’ in Jane’s barn at £100 per ton. Fred agrees to take the

hay to a neighbouring farm where it can be weighed. Has property passed to Fred?

b. Mary agrees to buy 100 bags of hay from John. The price is fixed at £1,000 on the understanding that the bags contain in total 10 tons of hay. Mary later weighs the bags and discovers that they contain 9 tons. Has property in the hay passed to Mary?

c. Jake goes into Mary’s furniture shop. He agrees to buy a set of kitchen units, which will be delivered on Monday. It is also agreed that workers employed by Mary will construct and fit the units on Tuesday. The units are delivered and placed in Jake’s garage, which he locks. Someone breaks into the garage and steals the units on Monday night. Mary refuses to replace the units and demands payment from Jake. Did property pass to Jake before the theft?

d. Would Goldcorp Exchange Ltd be decidedly differently in the light of s.20A?

Activity 4.9Think about the reasons why reform of the law was introduced in respect of contracts for the sale of part of an identified bulk. Do the rules resolve the problems? Do they create new problems? Can you suggest any ways in which the rules might be improved? Record your thoughts in your portfolio.

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SummaryProperty in specific goods passes when the parties intend it to be transferred. If no intention is evident, the Act sets out the rules in s.18 for determining when property will pass. If the contract is for the sale of unascertained goods, no property in the goods is transferred to the buyer until the goods are ascertained (s.16), unless the goods are part of an identified bulk of which the buyer is a tenant in common at common law or a co-owner under s.20A.

4.6 Risk


Which party bears the consequences of loss or damage to the goods? The general rule is that risk follows property: the owner of the goods bears any loss (s.20(1)). This rule applies irrespective of which party has possession of the goods.

The general rule will not apply where:

the parties have agreed that risk should pass (for example, Head v Tattersall (1871) LR 7 Exch 7 (Sealy and Hooley, pp.299-300)). The parties may agree that risk will pass even though the goods are unascertained (Sterns Ltd v Vickers Ltd [1923] 1 KB 78 (Sealy and Hooley, pp.302-03))

the loss was caused by the fault of one party, in which case that party bears the loss (s.20(2); Demby Hamilton & Co Ltd v Barden [1949] 1 All ER 435 (Sealy and Hooley, pp.300-01)).

one party is the bailee of the goods and the loss occurs through their lack of reasonable care, in which case that party will be liable (s.20(3); Wiehe v Dennis Bros [1913] 29 TLR 250 (Sealy and Hooley, pp.301-02)).

the seller is required by the contract to send goods to the buyer, in which case delivery to a carrier is presumed to constitute delivery to the buyer, who, therefore, bears the risk of loss in transit (s.32. See also s.33).

Activity 4.10Is this arrangement fair? Could the rules be improved?

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Where risk has passed before the buyer acquires the property in the goods or possession of them, and the goods are damaged through the negligence of the carrier, the buyer will not be able to sue the carrier (The Aliakmon [1986] AC 785). This rule has been effectively reversed where goods are carried by sea (Carriage of Goods by Sea Act 1992), but remains in relation to other forms of transit.

Activity 4.11a. What risks do the seller and buyer run and which risks are dealt with under

s.20(1) of the Act?

b. Acme contracts to buy 1,000 tons of wheat from a bulk of 10,000 tons held by Ecma in its warehouse and has paid. The warehouse burns down before any of the wheat is delivered. Who bears the loss?



4.7 Perishing of goods and frustration of contract


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

Section 6 might seem to resemble the doctrine of common mistake in the general law of contract, but goods that have never existed cannot be said to have perished. On the other hand, where the goods are part of a larger bulk and the bulk has perished, then, while s.6 does not apply, the doctrine of common mistake (where both parties contracted on the assumption that the bulk existed) or frustration (where the bulk perished and neither party was responsible for the loss or had assumed the risk of it occurring: 4.7.3) might apply under the general principles of contract law.

The goods may have perished where they exist but have lost their commercial character. For example, dates perished when underwater for 2 days and impregnated with sewage, even though they had commercial value (Asfar v Blundell [1896] 1 QB 123). The problem with this case is that it was not a decision under the Sale of Goods Act and there is a contrary – if rather dubious – authority, Horn v Minister of Food [1948] 2 All ER 1036.) The subject matter may have perished if part only has been lost: e.g. where 109 bags of a specified parcel of 700 bags were stolen (Barrow, Lane & Ballard Ltd v Phillip Phillips & Co. Ltd [1929] 1 KB 574). In addition, since specific goods includes an undivided share of goods (s.61(1)), if the goods perish, s.6 may apply.

Under s.7, where there is an agreement to sell specific goods and, without fault on the part of either party, the goods perish subsequent to the agreement and before the risk has passed to the buyer, the agreement is avoided. Note that this section does not apply where there is a contract of sale. (For the difference between an agreement to sell and a contract of sale, see 4.4.1 above.)

4.7.2 Unascertained goods perishingSections 6-7 do not apply to contracts for the sale of unascertained goods. If unascertained goods are sold by description (for example, ‘500 tons of wheat’), the seller is obliged to deliver. The seller cannot seek to excuse non-delivery by showing that goods of that description are not available at the time of delivery. The seller takes the risk of this eventuality and must pay damages in the event of being unable to deliver (Blackburn Bobbin Co Ltd v TW Allen & Sons Ltd [1918] 2 KB 467 (Sealy and Hooley, pp.308-09)).

The parties may, however, include a term (a force majeure clause) to excuse failure to deliver that is the result of certain events, such as war. They may agree that the contract is to sell goods drawn from an identified source, such as from the cargo on a named ship. Where there was a contract of sale for ‘200 tons of regent potatoes grown on land belonging to [the farmer] in Whaplode’, and, through no fault of the farmer, disease prevented the land from producing more than 80 tons, it was held that there was no breach. ‘It was not an absolute contract of delivery under all circumstances, but a contract to deliver so many potatoes, of a particular kind, grown on a specific place, if deliverable from that place’ (Howell v Coupland [1876] 1 QBD 258, Lord Coleridge CJ (Sealy and Hooley, p.311)). There is a difficulty with this case: the court held that this was a contract for specific goods, but the potatoes were not identified and agreed on at the time of the contract and so are not specific goods as defined by


the subsequent Sale of Goods Act. This means that if these facts were to be repeated ss.6-7 would not apply. But the decision may survive as a rule of common law by virtue of s.62(2). (For discussion of this case, see HR & S Sainsbury Ltd v Street [1972] 1 WLR 834 (Sealy and Hooley, pp.312-14).)

There is an obvious difficulty in treating as different those goods that are drawn from an identified source (sometimes called quasi-specific goods). To some degree all contracts for unascertained goods involve an identified source: the sale of ‘a Bentley motor car’ restricts the pool of goods from which the appropriation can be made; the sale of a certain number of lengths of ‘Norwegian timber’ identifies the only eligible source so that Swedish timber will not meet the obligation under the contract. It could, therefore, be said that all unascertained goods are quasi-specific in that they are drawn from an identified and limited source.

4.7.3 Frustration Aside from those situations already dealt with in which the goods are lost, the doctrine of frustration arises in sale contracts in the same way as in other types of contract: for example, through supervening illegality or impossibility caused by an unforeseen event. But it should be remembered that the courts are reluctant to invoke this doctrine and, in particular, have shown a disinclination to do so in sale contracts involving unascertained goods. Moreover, the doctrine of frustration will not apply where one party has agreed to run the risk of a particular loss or is responsible for that loss occurring.

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

Activity 4.12Why is it more useful to resolve cases like Howell v Coupland by the use of an implied term than to use the doctrine of frustration?


SummaryThe general rule is that risk of loss passes with property, but the parties may agree otherwise. Where there is a contract for the sale of specific goods and the goods perished before the contract without the knowledge of the seller, the contract is void. Where there is an agreement to sell specific goods and, without fault of either party, the goods perish subsequent to the agreement and before the risk has passed to the buyer, the agreement is avoided. In a contract for the sale of unascertained goods, the seller will not be excused from performance, unless the contract requires the goods to be drawn from a specified source when the courts may imply a term removing or modifying the obligation to perform in the event that this source is not available.


4.8 Transfer of title

4.8.1 The nemo dat rule


Where someone, who has either no property or whose rights are defective, disposes of goods, does the buyer acquire title to the exclusion of the true owner? Denning LJ remarked:

In the development of our law, two principles have striven for mastery. The first is for the protection of property: no one can give a better title than he himself possesses. The second is for the protection of commercial transactions: the person who takes in good faith and for value without notice should get a good title. (Bishopsgate Motor Finance Corporation Ltd v Transport Brakes Ltd [1949] 1 KB 322 (Sealy and Hooley, p.352).)

But, in truth, is there a struggle between two equal principles? The SGA states: ‘where the goods are sold by a person who is not their owner, and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had’ (s.21(1)). This is known as the nemo dat quod non habet† rule (or simply nemo dat) and Lord Goff, after referring to this rule, said, ‘The succeeding sections enact what appear to be minor exceptions to that fundamental principle’ (National Employers’ Mutual General Insurance Assocn Ltd v Jones [1990] 1 AC 24). It is important not to lose sight of this when considering the nature of the exceptions.

4.8.2 Estoppel


The first of the exceptions to the nemo dat rule is contained in s.21(1) itself. The part of that section quoted above is immediately followed by the words ‘unless the owner of the goods is by his conduct precluded from denying the seller’s authority to sell’. Where the true owner of the goods represents to the buyer that the person selling is the owner or is acting as an agent with authority to sell, the true owner is estopped from denying that authority to sell and the buyer acquires good title (Henderson & Co v Williams [1895] 1 QB 521 (Sealy and Hooley, p.356)). A car owner, who wished to raise money on his car without selling it, was estopped when he colluded in a transaction with a car dealer under which the car was represented to a finance company as belonging to the dealer (Eastern Distributors Ltd v Goldring [1957] 2 QB 600 (Sealy and Hooley, pp.353-55)). Although this does not create title in the purchaser, it prevents the owner from asserting their own title and so has the same effect.

There must be a representation, which may be by words and/or conduct. Merely handing possession of goods and/or documents of title is usually not sufficient, even if this has been done in a way that might be regarded as careless because, ‘a man who owns property is not under any general duty to safeguard it and… he may sue for its recovery any person into whose hands it has come’ (Moorgate Mercantile Co Ltd v Twitchings [1977] AC 890, Lord Wilberforce; see also Central Newbury Car Auctions Ltd v Unity Finance Ltd [1957] 1 QB 371 (Sealy and Hooley, pp.358-60)). In Industrial and Corporate Finance Ltd v Wyder Group Ltd t/a Ducati (2008) 152(37) SJLB 31, it was argued that there was an obligation on a finance company to register its interest in motorcycles, which meant a failure to register amounted to an estoppel under s.21(1). Yet, in spite of the defendant’s allegation that it was standard trade practice to register their interest, the court was not persuaded that the finance company had any such duty.

In Mercantile Credit Co Ltd v Hamblin [1965] 2 QB 242 (Sealy and Hooley, pp.360-61), the owner of a car signed forms in blank, without reading them, in the belief that they would enable a car dealer, who appeared to be respectable, to raise money on the security of the car. In fact, the dealer fraudulently used the forms to sell the car to a finance company. The Court of Appeal held that a duty of care existed between the

† Nemo dat quod non habet (Latin): ‘No-one (can) give what he or she has not got.’


owner and the finance company, but that there was no breach of that duty because she knew the dealer and reasonably believed him to be respectable, so that it was not negligent for her to sign the forms in blank. Moreover, two of the judges thought that, even if there had been negligence, it was not the negligence of the owner but the fraud of the dealer which caused the loss. On the other hand, by analogy with a case on the sale of land (Spiro v Lintern [1973] 1 WLR 1002), unreasonable behaviour by the owner in failing to correct a misrepresentation that the owner knows has been made to the seller by an agent could create an estoppel, if the seller acts on the basis of the misrepresentation and suffers loss as a consequence.

In Shaw v Metropolitan Police Commissioner [1987] 1 WLR 1332, the Court of Appeal took a rather narrow view of the use in s.21(1) of the word ‘sold’ as meaning that the estoppel principle did not apply where there was only an agreement to sell.

Activity 4.13Why were Farquharson Bros not estopped from denying the title of the third party in Farquharson Bros & Co v C King & Co [1902] AC 325 (Sealy and Hooley, pp.356-58)?

4.8.3 Sale under a voidable title


Under s.23, ‘When the seller of goods has a voidable title to them, but his title has not been avoided at the time of the sale, the buyer acquires a good title, provided he buys them in good faith and without notice of the seller’s defect of title (see also, Cundy v Lindsay [1878] 3 App Cas 459 (Sealy and Hooley, pp.349-51)).

There are many illustrations of a voidable contract involving misrepresentations as to identity, which will be familiar to students of the law of contract. To take one example, in Kings Norton Metal Co Ltd v Edridge, Merrett & Co Ltd [1897] 14 TLR 98, a manufacturer of metal received an order from ‘Hallam & Co’ and in consequence sent goods. It turned out that ‘Hallam & Co’ did not exist. The rogue resold the goods. It was held that the intention had been to contract with the writer of the order, and, although this had been induced by a fraudulent misrepresentation, that only made the contract voidable. Since it had not been avoided before the goods were resold to a third party, title passed to the latter.

The first issue is whether the seller (S) acquired title to the goods from the original owner (O), which will not be the case where S represents themselves to O as X and O’s intention is to sell to X and no one else. Here the contract of sale between O and S is void for mistake and S cannot pass title to the second buyer (B). But the courts are reluctant to reach this view and typically conclude that the intention is to sell to the person who made the purchase whatever his or her identity (Lewis v Averay [1972] 1 QB 198 (Sealy and Hooley, pp.375-76); contrast with Ingram v Little [1961] 1 QB 31, which is discussed in Lewis and is a rare example where the contract was void).

If the contract is merely voidable, the original owner must communicate their intention to rescind to the first buyer (S) within a reasonable period of time, and they cannot do this if they have done anything to affirm the contract with full knowledge of the relevant facts. Where S is a rogue, O is likely to face some difficulty in communicating their intention. In Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525 (Sealy and Hooley, pp.376-77), it was held that the true owner need merely take such steps as the reasonable owner would take to recover the goods. Caldwell, a car owner who had been the victim of fraud, informed the police and the Automobile Association. After doing these things, the car was sold by the rogue to a car dealer. The dealer had had previous dealings with the rogue, which ought to have enabled them to infer that this transaction was fraudulent. The dealer then sold the car to a finance company, which bought in good faith and without notice. The Court of Appeal concluded that the dealer was not an agent of the finance company so that the latter did not have the dealer’s knowledge, but that Caldwell had done sufficient to avoid the contract by informing the police before the sale to the dealer. Upjohn LJ remarked:


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

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

The decision in Caldwell was, to some extent, limited by the Court of Appeal in Newtons of Wembley Ltd v Williams [1965] 1 QB 560 (Sealy and Hooley, pp.383-85; two of the judges who sat in Caldwell also heard this appeal). It was held that, even if the owner had avoided the contract before the resale, title passed because the rogue was a buyer in possession and the sale had been made in the ordinary course of business of a mercantile agent, that is, at a market for used cars (see s.25(1); 4.8.5 below).

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

4.8.4 Seller in possession


If property in the goods has passed to B, but A remains in possession of the goods or documents of title and sells them to C who purchases in good faith and without notice of the sale to B, title passes to C, leaving B with only an action for breach of contract against A (s.24; s.8 of the Factors Act 1889 is almost identical).

Possession includes where goods are not in the physical possession of the seller, but are under their control: for example, goods held by a warehouse owner to the order of the seller. The seller’s possession does not have to be in any particular capacity or even lawful: ‘It is sufficient if he remains continuously in possession of the goods that he has sold to the purchaser’ (Worcester Works Finance Ltd v Cooden Engineering Co Ltd [1972] 1 QB 210, Lord Denning MR). Lord Denning thought the section might not apply where the seller’s possession had not been continuous (see also Pacific Motor Auctions Pty Ltd v Motor Credits (Hire Finance) Ltd [1965] AC 867 (Sealy and Hooley, pp.379-81)).

For the second buyer to acquire good title, the seller must deliver possession of the goods or documents of title: merely contracting a second sale is not sufficient to give title to the second buyer. In Michael Gerson (Leasing) Ltd v Wilkinson [2001] QB 514, machinery was sold to a finance company and leased back to the seller, who then sold it to a second finance company and leased it back. At all times the machinery remained in the possession of the seller, but it was held that the seller’s acknowledgement to the finance company that the machines were being held on its behalf amounted to a delivery to that company.

By ‘documents of title’ is meant those documents ‘used in the ordinary course of business as proof of the possession or control of goods, or authorising or purporting to authorise, either by indorsement or delivery, the possessor of the document to transfer or receive goods’ (s.61(1), see also Factors Act 1889, s.1(4). See Sealy and Hooley, pp.380-81).


4.8.5 Buyer in possession


In this situation the buyer has acquired possession of the goods and sells to a second buyer.

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

Section 9 of the Factors Act 1889 is similar (but see DF Mount Ltd v Jay & Jay (Provisions) Co Ltd [1960] 1 QB 159 (Sealy and Hooley, pp.387-89)).

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

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

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

c. the recipient acted in good faith.

The goods or documents of title (4.8.4 above) must have been obtained by the buyer under a sale or agreement to sell (‘bought or agreed to buy’), so this provision will not apply where the original sale contract is void or where possession is obtained under a bailment or hire-purchase or sale-or-return contract. The provision that the transaction will have ‘the same effect as if the person making the delivery… were a mercantile agent’ means that the buyer in possession is placed in the position of a mercantile agent and the second buyer must show that the circumstances of the sale would have been in the ordinary course of business of a mercantile agent (Newtons of Wembley Ltd v Williams [1965] 1 QB 560 (Sealy and Hooley, pp.383-85). On mercantile agents see 2.2.2 above).

The words ‘with the consent of the owner’ at the end of s.25(1) prevent the nonsense of a thief starting the whole chain of events and still passing good title. There can only be a buyer in possession where possession of the goods or documents of title has been obtained with the consent of the owner (National Employers’ Mutual General Insurance Assocn Ltd v Jones [1990] 1 AC 24 (Sealy and Hooley, pp.385-87)). Yet, it matters not how that consent was obtained – fraud is enough even though this may amount to theft (Pearson v Rose & Young Ltd [1951] 1 KB 275 (Sealy and Hooley, p.368)).

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

4.8.6 Sale under the Factors Act 1889, s.2


Merely being in possession of goods or documents of title does not, in itself, amount to a representation that the possessor has authority to sell those goods and to pass good title (see 4.8.2 above). However, where the person in possession of the goods is a factor (now normally called a mercantile agent), the buyer may acquire good title. A mercantile agent is an agent who is entrusted with the possession of goods or documents of title to goods and who is allowed to dispose of them, either in the agent’s own name or as a principal (see 2.2.2 above).


Under the Factors Act 1889, s.2(1), a sale, pledge, or other disposition shall be as valid as if expressly authorised by the owner of the goods where all the following are present.

The disposition is by a mercantile agent (Jerome v Bentley [1952] 2 All ER 114 (Sealy and Hooley, p.351)).

The mercantile agent is in possession of goods or of the documents of title to goods with the consent of the owner (see s.2(2), (3)). The owner must have specifically consented to the person having possession in their capacity as mercantile agent and not in some other capacity (for example, handing over goods for repair). Consent is given even though obtained by deception (Folkes v King [1923] 1 KB 282 (Sealy and Hooley, p.371)), since, although it might plausibly be suggested that such consent is not consent at all, the courts have tended to protect the innocent third party (but see Pearson v Rose & Young Ltd [1951] 1 KB 275 (Sealy and Hooley, p.368)). Once consent has been given it continues, in spite of the owner terminating such consent, unless the person dealing with the agent has notice of that termination (s.2(2)). The problem for the buyer is to know in what capacity the agent received possession of the goods.

The disposition is made when acting in the ordinary course of business of a mercantile agent.

The person acquiring the goods under the disposition must have acted in good faith and without notice of the mercantile agent’s lack of authority (Heap v Motorists’ Advisory Agency Ltd [1923] 1 KB 577 (Sealy and Hooley, pp.373-74)).

Activity 4.14Why did the buyer in Pearson v Rose & Young Ltd [1951] 1 KB 275 not acquire good title to the car?

Note: you will need to read the case to answer the question.

4.8.7 Motor vehicles let under hire-purchase


Part III of the Hire-Purchase Act 1964 (substantially re-enacted by the Consumer Credit Act 1974, schedule 4) means that a private purchaser obtains title where they acquire a motor vehicle for value and without notice from someone who is in possession under a hire-purchase or conditional sale agreement.

4.8.8 Powers of sale and resale

Essential reading Sealy and Hooley, pp.374-75 and 390.

Section 21(2)(b) provides that nothing in the Act affects ‘the validity of any contract of sale under any special common law or statutory power of sale or under the order of a court of competent jurisdiction.’ This retains powers of sale granted under pledges (where goods are delivered to someone – such as a pawnbroker – as security for a loan) or bailments, or to innkeepers, liquidators and others, which enable them to pass title to the buyer.

The SGA gives the seller the right to resell goods and pass property to a second buyer where the seller retained possession and the price has not been paid by the original buyer (see 6.3).

Activity 4.15What general principle applies where someone acquires goods from a person who is not their owner?


Useful further reading Bridge, M. Personal property law. (Oxford: Oxford University Press, 2002),

pp.115-36.

Atiyah, pp.361-404.

SummaryThe general rule is that a buyer cannot acquire a better title than that of the seller. This rule can be overridden in particular situations where someone who takes in good faith and for value without notice will acquire good title and, therefore, will be able to resist the claims of the original owner. It must be emphasised that these are narrow exceptions and that, on the whole, the courts have had greater regard for the general rule.

Sample examination question ‘In the development of our law, two principles have striven for mastery. The first is for the protection of property: no one can give a better title than he himself possesses. The second is for the protection of commercial transactions: the person who takes in good faith and for value without notice should get a good title.’ (Denning LJ)

Discuss.


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

While you would certainly get credit for this, it is important always to address the question asked and here the question does not ask for a straightforward list. What is being sought is a discussion of Denning LJ’s view that there is a battle between these ‘two principles’. Thus, better candidates will go beyond a mere list of the rule and its exceptions and consider other matters. You need to show an understanding of the issues underlying this area of law. What is the law seeking to achieve? Why do these rules exist in this form? Do they achieve their objective(s)? It is by engaging in analysis that you will demonstrate the thorough understanding of the law which will enable you to obtain higher marks.

You might tackle this question by looking at the following questions. What are the two principles? Is Denning’s view of the relationship correct, or was Lord Goff closer to the truth when he said that those sections in the Act that followed s.21(1) ‘appear to be minor exceptions to that fundamental principle’ (National Employers’ Mutual General Insurance Assocn Ltd v Jones [1990] 1 AC 24)? Do the exceptions undermine the nemo dat principle too much? Is the nemo dat principle too rigid? Why has parliament (and the courts?) given protection to (a) the owner and (b) the interests of innocent third parties? Has there been a shift in favour of the latter and, if so, why has this happened (again see Denning LJ)? How is the balance to be struck between the interests of the owner of the goods and those of the innocent third party? What problems exist in this area and what reforms might be suggested?


Reflect and review







Ready to move on


Need to study again

I can discuss the approach taken to interpretation of the Sale of Goods Act.

I can analyse the components of the definition of a contract of sale.

I can explain the circumstances in which property in goods is passed.

I can identify how risk is passed.

I understand the nemo dat rule.

I can discuss and illustrate the exceptions to the nemo dat rule.


Must revise

Revision done

4.1 The Sale of Goods Act

4.1 The scope of the Act

4.3 What is a contract of sale of goods?

4.4 The sale contract

4.5 ‘Transfers of agrees to transfer the property’

4.6 Risk

4.7 Perishing of goods and frustration of contract

4.8 Transfer of title

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80

5.1 Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81

5.2 Delivery and payment . . . . . . . . . . . . . . . . . . . . . . . . . . .82

5.3 Implied terms as to title and quiet possession: s.12 . . . . . . . . . . . .85

5.4 Implied term as to description: s.13 . . . . . . . . . . . . . . . . . . . .88

5.5 Implied terms as to quality: ss.14-15 . . . . . . . . . . . . . . . . . . . .92

5.6 Implied term as to satisfactory quality: s.14(2) . . . . . . . . . . . . . . .93

5.7 Implied term as to fitness for particular purpose: s.14(3) . . . . . . . . . .99

5.8 Implied terms in sales by sample: s.15 . . . . . . . . . . . . . . . . . . 102

5.9 Limitation or exclusion of liability . . . . . . . . . . . . . . . . . . . . 103

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

5 Sale of goods: performance and implied terms


Introduction

Subject to contrary agreement by the parties, the basic duty of the seller is to deliver the goods to the buyer and of the buyer to accept and pay for goods that conform to the contract. The seller must deliver exactly the quantity stipulated and the buyer is not obliged to accept a delivery that either falls short or exceeds the stipulated amount. The goods delivered must comply with the express terms set out in the contract, but they must also comply with the terms implied into the sale contract by ss.12-15.


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

discuss the implied terms in ss.12-15

discuss the relationship between the different implied terms

outline the limits imposed on attempts by the seller to exclude or restrict liability for breach of the implied terms.

Commercial law Chapter 5 Sale of goods: performance and implied terms page 81

5.1 Terms


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

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

The breach of an implied or express term gives rise to a remedy, although the nature of that remedy depends on the significance of the term, unless the parties have stipulated a remedy. The law of contract categorises terms as conditions, warranties and innominate terms,† although the Act only refers to the first two categories. Whether a stipulation in a sale contract is a condition or a warranty depends on the construction of the contract (s.11(3)). This is a question of law for the court, except where the Act designates a term as a condition or warranty (for example, s.12, discussed in 5.3.1 below). The court will look at the substance and not the form: in other words, a term is not a condition or a warranty merely because it is labelled as such by the parties.

A condition is a term of such importance to the contract that its breach entitles the innocent party to treat the contract as discharged (s.11(3)) and so reject the goods and demand the repayment of the price. The buyer can waive the breach or treat it as a breach of warranty (s.11(2)) – it may be that, in spite of the defect, the buyer wishes to retain the goods – and will lose the right to reject after acceptance of the goods (s.11(4); see 6.2.1). The seller may be able to repair a breach of condition through a fresh delivery of goods that comply with the contract, although usually whether or not the seller has this opportunity will depend upon whether there is time under the contract for delivery (see 5.2).

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

The Act does not mention the third way in which the courts have classified contractual terms, namely innominate terms. In Cehave NV v Bremer Handelsgesellschaft mbH [1976] QB 44, the Court of Appeal held that the categorisation in the Act of terms as conditons and warranties did not exhaust the possibilities. Fourteen years earlier, in a case on the hire of a ship (Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha [1962] 2 QB 26), it had been decided that some terms could not be classified at the time of the contract as conditions or warranties and that the significance of these terms could only be assessed at the time of the breach. The court in Cehave adopted this idea in relation to a sale contract, arguing that s.62(2) preserves the common law and, therefore, the law relating to innominate terms. In this case the goods, although damaged, were ultimately used for their intended purpose. The innocent party, which wished to reject the goods because the market had fallen and the goods could be obtained more cheaply, argued that the damage amounted to a breach of a condition implied into the contract by the Act and a breach of an express term that the goods should be in ‘good condition’. The court held that the term implied by the Act had not been breached and the express term was an innominate term, so that, since the damage was only minor, the innocent party was only entitled to damages. It is odd that the breach of the express term and of the implied term were seen as having different consequences when both referred to the condition of the goods: in other words, the court held that the goods were in good condition for the purposes of the Act, but not for the express term. The views of the Court of Appeal were approved by Lord Wilberforce in Reardon Smith Lines Ltd v Hansen Tangen [1976] 1 WLR 989. It is worth noting that this anomaly

† Innominate terms = terms of a contract that cannot be considered conditions or warranties.


might be dealt with now by s.15A (which was introduced in 1994), under which a non-consumer buyer can lose the right to reject where the breach is so slight that it would be unreasonable to reject the goods.


5.2 Delivery and payment


5.2.1 Delivery, acceptance and paymentAccording to s.27, ‘It is the duty of the seller to deliver the goods, and of the buyer to accept and pay for them, in accordance with the terms of the contract of sale.’ These concurrent duties (to deliver and to accept and pay) mean that, unless otherwise agreed, ‘the seller must be ready and willing to give possession of the goods to the buyer in exchange for the price and the buyer must be ready and willing to pay the price in exchange for possession of the goods’ (s.28). This might seem odd since s.2(1) defines a sale contract in terms of passing property and not possession, but it would be even more curious if there were no obligation to pass possession to the buyer. Note that the right of the buyer to demand delivery can be defeated by the unpaid seller’s lien (see 6.3.4). The seller need not have tendered delivery before suing for the price where it is clear that the buyer is not going to pay and the seller is ready and willing to deliver. Similarly, the buyer, who is ready and willing to pay, need not tender payment before suing for non-delivery. The innocent party can, therefore, elect to accept or refuse the other party’s anticipatory repudiation – acceptance means the contract is terminated, refusal means all the obligations (including those of the innocent party) remain (see Gill & Duffus SA v Berger & Co Inc [1984] AC 382; Fercometal SARL v Mediterranean Shipping Co SA [1989] AC 788).

5.2.2 Delivery Delivery by the seller is defined as merely the ‘voluntary transfer of possession’ (s.61(1)). This means that the buyer collects the goods from the seller or, in the case of specific goods, from the place where the goods are kept (s.29). This implies that the buyer bears the cost of delivery; although the seller pays to put the goods into a deliverable state (s.29(6)). Where the seller is authorised to deliver the goods to a carrier for conveying to the buyer, handing the goods to the carrier constitutes delivery to the buyer (s.32(1)). These presumptions may be displaced by the contrary agreement of the parties. They may agree that the seller will take the goods to the buyer, or retain them as agent or bailee for the buyer, or hand to the buyer the means of controlling the goods (for example, keys to a warehouse in which the goods are held), or instruct someone to hold the goods for the buyer (attornment: s.29(4); Sealy and Hooley, pp.75-76), or give the buyer the document of title to the goods (for example, the bill of lading where goods are on board ship, see Chapter 7).

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


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

5.2.3 QuantityIt is a breach of an implied condition to deliver less or more than the contracted quantity of goods (s.30), or, unless agreed, to deliver in instalments (s.31(1)). The courts have always permitted short or long (i.e. over) delivery where the deviation is microscopic (Margaronis Navigation Agency Ltd v Henry W Peabody & Co Ltd [1965] 2 QB 430). Section 30(2A), introduced in 1995, states that where the buyer is not a consumer and the seller is able to show (s.30(2B)) that the excess or shortfall is ‘so slight that it would be unreasonable’ to reject the goods, the buyer must accept delivery.

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

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

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


There is a close relationship between these provisions and the seller’s duties regarding the description and quality of the goods, which are discussed below. If S agrees to sell 1,000 tons of wheat and 100 tons are not of satisfactory quality, there is a short delivery since only 900 tons conform to the goods agreed and this entitles B to reject the entire consignment. Alternatively, B could reject on the grounds of breach of the term implied by s.14(2), which requires all the goods to be of satisfactory quality. The same principle will apply where the parties agree delivery by instalment since each instalment must be of the right quantity and quality. If this route is taken, s.15A may apply (see 5.6.4 below).

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

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

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

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

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

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


Activity 5.1Under a sale contract, the buyer agrees to provide a vessel at a port nominated by the seller so that the goods can be loaded. The contract stipulates that the goods are to be loaded by 30 June and the buyer is required to give the seller 15 days’ notice of the vessel’s readiness for loading. The buyer does not give notice of readiness until 17 June. Can the seller repudiate the contract?


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


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

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

In Rowland v Divall [1923] 2 KB 500 (Sealy and Hooley, pp.371-72), A sold a car to B for £334. B used the car for two months, during which time he also repainted it. B then sold it for £400 to C who used it for a further two months. The car turned out to have been stolen before it came into A’s possession and was, therefore, taken away from C by the police. The effect of the nemo dat quod non habet rule (see 4.8) is that the buyer can acquire no better title than the seller, so neither A nor B had title to the car. C recovered the purchase price from B and B recovered the purchase price from A without any allowance for the use of the car (see also Karflex Ltd v Poole [1933] 2 KB 251; Butterworth v Kingsway Motors Ltd [1954] 1 WLR 1286).

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

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

Rowland elevates the status of the implied term in s.12(1) above that of the other implied terms. Under s.35 the buyer loses the right to reject for a breach of an implied condition where there has been acceptance of the goods (see 6.1). This provision certainly applies to a breach of the implied conditions in ss.13-15, and there is nothing in s.35 to suggest that it does not also apply to a breach of s.12. If s.35 did apply and the goods had been accepted, the buyer would only be entitled to an action for damages (s.11(4)) and a deduction could be made from the damages for the use of the car. Atkin LJ, however, removed this argument by implying into all contracts of sale that ‘a breach of the condition that the seller has a right to sell the goods may be treated as a ground for rejecting the goods and repudiating the contract notwithstanding the acceptance.’ In other words, the rules on acceptance do not apply to s.12. This does


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

The case presents other difficulties. Substitute for the car a bag of fruit. If the fruit is consumed, the buyer is still entitled to the return of the full purchase price. Of course, it could be argued that the buyer may be liable if an action for conversion were brought by the true owner of the fruit, but the court in Rowland v Divall did not make the right of the buyer dependent on their liability to the true owner. This leads to the following curiosity. If A sells the fruit to B and B eats it, C, who is the true owner, can choose to sue A or B for conversion; if C sues A, A will pay damages to the value of the fruit to C and can also be required by B to repay the price of the fruit. Atiyah (p.112) suggests that a solution to this would be that A would not have to pay B because, on repudiating the contract, B must return the goods and B’s consumption of the fruit makes this impossible. The problem with that solution is C might sue B for conversion, in which case B will pay damages to C and will not be able to reclaim the price from A. Atiyah argues that this could be dealt with by allowing B to claim an indemnity from A under the Civil Liability (Contribution) Act 1978.

Why is title given this fundamental status? Why not treat a breach of the implied terms on quality in s.14 (see 5.6-5.8) as rendering a contract of sale not a contract of sale? After all, goods are often bought primarily with a view to their consumption, so buyers might regard quality as at least as important as title. Indeed, the possibility that food is poisonous or the car is unroadworthy (both matters of quality) may be of greater significance to the buyer, who does not intend to buy goods in that state, than that the goods were stolen. Aityah (p.112) suggests that the decision ‘rests on a fallacy. The object of a contract of sale is surely to transfer to the buyer the use and enjoyment of the goods free from any adverse third-party claims. If the buyer has such use and enjoyment and no third party claim is made against him, it seems unrealistic to talk of a total failure of consideration.’ But does this represent what the buyer expects they are acquiring? Do buyers really not care about their title to the goods they are consuming?

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

There has been some interest in reforming s.12, by both the Law Reform Committee and the Law Commission, which have suggested that the right to the return of the price should be replaced by a right to damages. However in 1987 the Law Commission abandoned such ideas, both because it accepted the reasoning in Rowland v Divall and because of the complexity of any reform.

The provision in s.12(1) goes beyond the question of whether the seller passes good title. Although the sub-heading for s.12 is ‘Implied terms about title, etc’, the section makes no mention of title. Instead it refers to the right to sell. Typically, this is regarded as the same as title, but there are differences. The seller need not have title as long as they have the right to sell: for example, the owner consents to the sale. On the other hand, there will be a breach if the seller is not able to pass the right to sell, even though they are the owner of the goods. In Niblett v Confectioners’ Materials Co. [1921] 3 KB 387 (Sealy and Hooley, p.373), tins of preserved milk, which had been sold by CM, an American company, to N were detained by customs on arrival in England because the labels appeared to infringe the trademark of an English company. Since the English company could have obtained an injunction preventing the sale of the tins in England, it was held that CM had no right to sell them, even though they owned the tins.


Finally, where the seller does not have title to the goods, the buyer may, nevertheless, acquire good title under one of the exceptions to the nemo dat quod non habet rule (see 4.8), but the seller is in breach of s.12(1) because they have no right to sell (Barber v NWS Bank plc [1996] 1 WLR 641).

Activity 5.2X obtains possession of a car under a contract for hire-purchase. Under such a contract title remains with the hire-purchase company until all the payments have been made and the hirer (X) has exercised an option under the contract. Before completing the payments and exercising the option under this contract, X sells the car to KM, a car dealer, who sells it to B. Neither KM nor B is aware of the hire-purchase contract. B uses the car for almost a year before discovering all of these facts.

Advise B.†

5.3.2 Limited title: s.12(3), (4)Under s.12(3) and (4), where the seller contracts to pass only ‘such title as he or a third person may have’, there is an implied term that the seller has disclosed all charges or encumbrances before the contract. In other words, where there is uncertainty as to the seller’s title, the parties can agree to the sale of such title as they have on the basis that such defects as are known to the seller are disclosed.

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

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

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

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

† Note that you are asked to ‘advise B’. Concentrate on this task as a lawyer would. In an exam problem question you will lose marks for advising X or KM.


Study pack reading Bridge, M. ‘The title obligations of the seller of goods’ in Palmer, N. and E.

McKendrick (eds), Interests in goods. (London: LLP Professional Publishing, 1998) [ISBN 1859781772] pp.303-327.

Activity 5.3R supplied a computer system and property passed to U. There then arose a dispute between the parties and U refused to hand over money owed. R responded by activating a ‘time lock’, which prevented the system from being used.

Advise U.


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

5.4 Implied term as to description: s.13


5.4.1 Implied term as to descriptionWhere there is a contract for the sale of goods by description, there is an implied condition that the goods correspond with the description (s.13(1), (1A)). Unlike s.14 (see 5.5 below), there is no need to show that the sale was ‘in the course of business’, so s.13 applies to sales by private individuals, which helps to explain its use in Beale v Taylor [1967] 1 WLR 1193.

The strictness of the obligation is illustrated by Arcos v Ronaasen [1933] AC 470 (Sealy and Hooley, pp.399-400) where the contract for half-inch thick wooden staves was breached when most of the staves failed to meet this requirement. The staves were commercially suitable for the construction of barrels, for which they had been ordered, and the buyers’ reason for bringing the action was to escape from the contract because a fall in the price of timber meant they could obtain the staves more cheaply elsewhere. The House of Lords held that the reason for rejecting the goods was irrelevant: the staves did not conform to the description and that entitled the seller to reject. In Re Moore & Co Ltd and Landauer & Co Ltd’s Arbitration [1921] 2 KB 519 (Sealy and Hooley, p.399), there was a breach when the seller, who was required to deliver 3,000 tins in boxes of 30 tins, delivered around half in boxes of 24 tins, even though again the buyers would have suffered no disadvantage.

In Arcos, Lord Atkin said, ‘If the seller wants a margin he must and in my experience does stipulate for it’. In Re Moore, Scrutton LJ, commenting on the argument that the buyer suffered no commercial disadvantage, said, ‘a man who has bought under a contract thirty tins to the case may have sold under the same description, and may be placed in considerable difficulty by having goods tendered to him which do not comply with the description under which he bought, or under which he has resold’. Only minor, commercially insignificant deviation is allowed: ‘No doubt there may be microscopic deviations which business men and therefore lawyers will ignore’ (Arcos v Ronaasen [1933] AC 470 (Sealy and Hooley, pp.399-400), Lord Atkin).


The courts have sought to shift away from such a literal interpretation of contracts and thereby soften the impact of the strict liability rule. In Steel & Busks Ltd v Bleecker Bik & Co Ltd [1956] 1 Lloyd’s Rep 228, the contract was for the delivery of goods ‘quality as previously delivered’, but the court held that there was no breach of s.13, in spite of the goods containing a chemical not present in earlier deliveries. It was reasoned that the evidence indicated that the goods were within the description as understood by the trade. Similarly, in Peter Darlington & Partners Ltd v Gosho Co Ltd [1964] 1 Lloyd’s Rep 149, it was held that canary seed conformed with a description in the contract that the seed would be ‘pure’ even though only 98 per cent pure because the trade accepted that no canary seed was 100 per cent pure and 98 per cent represented the highest standard of purity. In his discussion in Reardon Smith Lines Ltd v Hansen-Tangen: The Diana Prosperity [1976] 1 WLR 989 (Sealy and Hooley, pp.401-03), Lord Wilberforce seemed content with Arcos, but called Re Moore ‘excessively technical and due for fresh examination in this House’. In addition, s.15A may now excuse a slight breach.

5.4.2 DescriptionMost contracts of sale will contain some description of the goods. This description may be express, such as words said or labelling on packaging, or it may be implied from the circumstances of the sale – a banana-like object on display among bananas is, probably, being described as a banana. A contract for the sale of unascertained or future goods will always be a sale by description and there is no appropriation where the goods do not correspond to their description in the contract (see 4.3.3 above). Where there is a sale of specific goods, there will be a sale by description ‘so long it is sold not merely as the specific thing, but as a thing corresponding to a description’ (Grant v Australian Knitting Mills [1936] AC 85, Lord Wright). It may seem curious that in a sale of specific goods there could be breach of s.13 when by definition the sale is of goods that have been identified and agreed upon by both parties (see 4.3.3). Yet, often the buyer of specific goods has relied on a description: where a shopper picks a bag of flour off a supermarket shelf they are entering into a contract for specific goods, but they are doing so in reliance on the description of the goods as flour (see s.13(3)). In other words, in a sale of specific goods the description does not identify the goods, it defines what it is that the seller has agreed to deliver: the bag of flour must contain flour.

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

In Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441, the sale contract stipulated, ‘Norwegian Herring Meal fair average quality of the season, expected to analyse not less than 70% protein, not more than 12% fat and not more than 4% salt.’ Lord Hodson said that, ‘a term ought not to be regarded as part of the description unless it identifies the goods sold’. He added, ‘Although quality could be used, no doubt, as part of a description it is, I think, not so used in this case; there is a warranty of quality but no more.’ Lord Guest’s view was that, ‘Where goods are unascertained, “description” implies a specification whereby the goods can be identified by the buyer’. On this ground he thought the measurement in Arcos v Ronaasen [1933] AC 470 (Sealy and Hooley, pp.399-400) was part of the description. He also acknowledged that quality might be part of the description. He referred to Varley v Whipp [1900] 1 QB 513, where statements that a reaping machine was a year old and had cut only 50-60 acres were part of the description because, according to Lord Guest, they identified the goods as a nearly new machine. In his view the words ‘fair average quality’ in the Ashington Piggeries contract did not specify the goods so as to enable them to be identified, and, therefore, they merely went to the issue of quality.

In this case, Lord Diplock observed:


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

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

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

The court in Reardon Smith Lines Ltd v Hansen-Tangen: The Diana Prosperity [1976] 1 WLR 989 (Sealy and Hooley, pp.401-03) emphasised that the key issue is what the parties contemplate as forming part of the description. The contract was for ‘Newbuilding motor tank vessel called Yard No. 354 at Osaka Zosen’ and laid out the specifications of the vessel. In the event, Yard No. 354 was too small so the vessel was built at a yard 300 miles away. Although this was not a sale contract, Lord Wilberforce explicitly sought to apply principles consistent with those in sale contracts. He concluded that the location of the yard was not of importance to the parties and was not part of the description:

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

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

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

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

The problem is to determine when any description provided amounts to a term and when it is merely a representation: in T & J Harrison v Knowles and Foster [1918] 1 KB 608 a statement that two ships had a capacity of 460 tons was made before the contract but not included in the written contract, and the court held that this was a mere representation. However, in Beale v Taylor the phrase ‘1961 Herald’ was treated as a contract term. In Harlingdon & Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd [1991] 1 QB 564 (Sealy and Hooley, pp.403-05), Nourse LJ explained:


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

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

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

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

Nourse LJ observed that where the buyer inspected goods before the contract and the particular characteristics later complained of would have been apparent on a reasonable examination of those goods, it is unlikely that those characteristics were intended by the parties to form part of a contractual description. This will not be so where the description related to something not apparent on inspection: so, in Beale v Taylor [1967] 1 WLR 1193, it seems not to have been apparent from the inspection carried out by the buyer that the car was constructed from two different vehicles. This seeks to get around the curious fact that s.13 does not allow for the possibility of the seller not being liable where the buyer has inspected the goods and should have realised they did not comply with the description provided – a provision to this effect is included in s.14(2).

5.4.4 Is s.13 really necessary?The effect of cases such as Reardon Smith Lines Ltd v Hansen-Tangen: The Diana Prosperity [1976] 1 WLR 989 (Sealy and Hooley, pp.401-03) and Harlingdon & Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd [1991] 1 QB 564 (Sealy and Hooley, pp.403-05) is to reduce the scope of s.13. As has been observed, it is difficult to see how a promise concerning the description, which the court treats as a term of the contract, cannot simply be enforced as such, and the ordinary rules of contract law would provide a good deal more flexibility than s.13, which makes a description a condition. The buyer in Beale v Taylor would not suffer since the contract surely contained an express term by which the seller expressly promised to deliver a car of a particular date and model, so there was no need to resort to the uncertainties of s.13. Similarly, the question of whether or not the buyer promised to deliver a painting by Münter can be resolved without s.13. It is also worth remembering that if the buyer was induced to enter the contract on the basis of a false representation, they may have remedies for misrepresentation.


Activity 5.4a. Read Reardon Smith Lines Ltd v Hansen-Tangen: The Diana Prosperity [1976] 1 WLR

989 (Sealy and Hooley, pp.379-81). In what circumstances might the words ‘Yard No 354 at Osaka’ have amounted to a description within the terms of s.13?

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

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


5.5 Implied terms as to quality: ss.14-15

Sections 14 and 15 contain implied terms as to quality, but they are prefaced with the caveat emptor (let the buyer beware) principle. Section 14(1) states that, aside from those sections, ‘there is no implied term about the quality or fitness for any particular purpose of goods supplied under a contract of sale.’ This does not prevent the parties including express terms relating to quality or such terms being implied by usage (s14(4)). Moreover, the exceptions to the caveat emptor principle contained in ss.14-15 are so broad that it might be suggested the principle should be reformulated as ‘let the seller beware’ (caveat venditor).

The obligations in ss.13-15 are often lumped together as defining (along with any express terms) the seller’s duty to provide goods of a particular quality. Yet, there is a disconnection between the terms implied in s.13 and those in ss.14-15. Goods may conform to description and be of poor quality, or they may be of good quality and not conform to description. On the other hand, quality and description may be difficult to separate: the description of goods often refers to quality and the issue of quality is often linked to the description of the goods (for example, s.14(2A); and see 5.4 above).

Useful further reading Brown, I, ‘The swing of the pendulum from caveat venditor to caveat emptor’

(2000) 116 LQR 537.


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


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

The shift from ‘merchantability’ to ‘satisfactory quality’ encompasses some of the problems confronting the Act. The attempt was to bring clarity to the Act and to reflect a shift towards consumer protection – remember that the 1893 Act codified case law that originated principally in transactions between commercial parties. However, how far ‘satisfactory quality’ moves us on is debatable. Moreover, the shift towards consumer protection may make the Act less relevant to commercial transactions. The other issue is whether the courts should start from scratch or whether, because (like satisfactory quality) merchantability rested on notions of reasonableness, they should refer to previous cases.

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

What constitutes ‘in the course of a business’ (see s.61(1))? The sale does not have to be for the purpose of the business, nor is it necessary that the goods being sold are those in which the business normally deals. In Stevenson v Rogers [1999] 1 All ER 613, a fisherman operated one vessel and for only the second time in 20 years he sold a vessel. In determining whether this was a sale in the course of business, Potter LJ observed, ‘it seems a most curious result that the sale by a seller of the very asset without which he could not carry on his business, with the intention of purchasing a replacement for the purpose of continuing that business, should not be regarded as a sale made in the course of a business’. It has been suggested that this was out of line with the decision in R & B Custom Brokers Co Ltd v United Dominions Trust Ltd [1988] 1 All ER 847, which concerned the meaning of ‘in course of business’ in the Unfair Contract Terms Act 1977 and concluded that it should be construed (as in the Trade Descriptions Act 1968) as requiring a degree of regularity. However, the statutes cover different areas: the courts give an extended meaning to the SGA so that the quality provisions apply to a broader range of transactions, while confining the meaning in the 1977 Act because by doing this they restrict the ability to exclude or limit liability.

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


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

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

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

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

In other words, goods are satisfactory if a reasonable person would regard them as satisfactory. In its recommendations, the Law Commission suggested the phrase ‘acceptable quality’, but this was later changed to ‘satisfactory quality’: Law Commission, Sale and Supply of Goods (Law Com No 160, cmnd 137, 1987).

The reasonable person is someone ‘who is in the position of the buyer, with his knowledge’ (Bramhill v Edwards [2004] EWCA Civ 403). The test does not involve asking whether the reasonable person would have rejected the goods since such a person might regard them as unsatisfactory and yet choose to retain them (Clegg v Olle Andersson T/A Nordic Marine [2003] EWCA Civ 320. See also s.35(6)(a) and 6.1 below). But, ‘the evidence should go beyond the simple assertion that [the buyers] were not satisfied with the [goods]; instead, it is necessary to establish that the [goods] were objectively of unsatisfactory quality…’ (Wyman-Gordon Ltd v Proclad International Ltd (No 2) [2007] CSOH 11 at [46]).

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

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

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

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

b appearance and finish

c freedom from minor defects

d safety, and

e durability.

The Sale and Supply of Goods to Consumers Regulations 2002, regulation 3 added a new s.14(2D) and 14(2E), which extended the definition of satisfactory quality, but these provisions apply only where the buyer deals as a consumer – that is, someone not buying for purposes of trade, business or profession.


The words ‘in appropriate cases’ indicate that not all the factors in s.14(2B) will always be relevant. It depends on what a reasonable person would regard as relevant. The significance of one factor may depend on another. The inclusion of ‘fitness for all the purposes’ is a shift from the previous position under which goods that had several purposes were of merchantable quality if fit for one purpose. The aim was also to separate the test of fitness for the common purposes (s.14(2)) from fitness for an uncommon purpose (s.14(3). However, it is not clear that this has been achieved because the purposes for which goods of the kind are commonly supplied will be determined by their description and so forth. The buyer of a car for scrap cannot claim that it is not fit for driving – the common purpose of a car of that description is to be used for scrap. In short, if the goods are for an unusual purpose, they will be described as such and so a claim arises under s.14(2) and s.14(3). If the unusual purpose is not mentioned, no claim will arise under either section if they are not fit for that purpose.

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

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

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

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

Where part of a consignment of goods is of unsatisfactory quality, the buyer may reject for breach of s.14(2) (subject to s.15A, where the defect is slight) or on the basis that there has been a short delivery of goods (Jackson v Rotax Motor & Cycle Co Ltd [1910] 2 KB 937; see 5.2.3).


5.6.5 ExamplesIn Rogers v Parish (Scarborough) Ltd [1987] QB 933, Mustill LJ discussed the interrelationship of factors similar to those in the present s.14(2). The case concerned the sale of a new Range Rover car.

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

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

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

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

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

In Hazlewood Grocery Ltd v Lion Foods Ltd [2007] EWHC 1887 (QB), L supplied H with chilli powder that contained a minute amount of an industrial dye. A term in the sale contract set out the parameters for possible contaminants, but otherwise required the powder to be free from ‘foreign and extraneous matter’. Before the contamination was discovered the powder was used by H in the manufacture of food. The court held that the express term requiring the powder to be free from extraneous matter was an absolute obligation (see Arcos Ltd v EA Ronaasen & Son [1933] AC 470). Moreover, the


powder was not of satisfactory quality (s.14(2), nor fit for its purpose under s.14(3)) because products made with it were liable to be posted on the website of the Foods Standards Agency (the statutory regulator for the food industry) and subject to recall. The FSA’s action in recalling the product was, therefore, foreseeable and reasonable. (See also Webster Thompson Ltd v J G Pears (Newark) Ltd & Ors [2009] EWHC 1070 (Comm).)

Activity 5.5In view of the health risks in smoking cigarettes, could a smoker argue that cigarettes are not of satisfactory quality?

5.6.6 Defects of which the buyer is aware and latent defectsThere will be no breach of s.14(2):

a. ‘where the defect is specifically drawn to the buyer’s attention before the contract is made’ (s.14(2C)(a)).

b. ‘where the buyer examined the goods before the contract is made, [any defect] which that examination ought to reveal’ (s.14(2C)(b)).

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

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

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

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

The impact of a latent defect (that is, one of which neither seller nor buyer was aware) will be tested by asking whether the reasonable buyer would have accepted the goods as of satisfactory quality if they had known of the latent defect. The seller cannot plead that they were unaware of the defect (Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31). Where goods, such as medicines, are dangerous when sold without appropriate instructions, it might be suggested that if the defect had been known to the reasonable buyer they would have been able to use them safely and, therefore, they are of satisfactory quality. However, the instructions are part of the goods so that their absence means there is no need to be driven to this conclusion. Where the goods cannot be safely used without the instructions, they are defective if those instructions are not supplied.


The problem with this entirely logical view arose in Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31 (see also Aswan Engineering Establishment Co v Lupdine Ltd [1987] 1 WLR 1). Animal feedstuff was made with groundnut extract, which, while fit for cattle, was poisonous to pheasant and partridge chicks. The House of Lords held that the feed was not unmerchantable, even though no warning had been given to the buyers. The majority of their lordships took the view that if the reasonable buyer had full knowledge of the facts, including the toxic nature of the feed, he or she would have accepted the goods. The problem with this reasoning is that it was the lack of warning that rendered the goods unsafe – like medicines, electrical goods and the underwear in Grant v Australian Knitting Mills Ltd [1936] AC 85, the feed would have been safe if a warning had been provided. This curious approach may be a result of the strictness of the law where there is a breach of condition, no matter how slight; but s.15A removes this issue because it prevents the buyer from rejecting the goods where the breach is so slight as to render that remedy unreasonable. It might be argued that changes have affected the law, such as the reference in s.14(2B)(c) and (d) to ‘freedom from minor defects’ and to safety; although if the reasoning in Henry Kendall were applied these would make no difference because the goods would be acceptable if the shortcomings were known.

There is another problem. Where, at the time of the contract, both parties are aware that the goods possess a particular characteristic, but only later does it emerge (for example, because of advances in scientific knowledge) that this characteristic amounts to a defect, what is the effect of this discovery? For example, the sale of building materials containing asbestos before the dangers of that material were discovered. Take the reverse situation. The parties were not aware at the time of sale of a particular characteristic of the goods which render them unsatisfactory. By the time the parties do become aware of this characteristic, science has shown it to be harmless. Are these matters to be determined according to the state of knowledge at the time of the contract, or can later discoveries be taken into consideration? In Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31, after the sale of animal feed it was found that certain ingredients were toxic. However, before the trial further research discovered that, although toxic, the ingredients could be used in small quantities for cattle feed. It was held that knowledge acquired between the sale and the trial was relevant, so the latest information was admitted to show that the feed was of merchantable quality. (Note that the case was brought under the old s.14(2) when it was only necessary to show that the goods were fit for one of the purposes for which such goods were commonly supplied.) The logic of these positions is that if the buyer rejects goods because according to current knowledge they are unsatisfactory, the buyer will be liable for damages if a change in knowledge, which occurs after that rejection, shows that the goods were not of unsatisfactory quality. It seems wrong to focus on whether the buyer would retain goods once the defect has been discovered, rather than on whether the buyer would have accepted the goods if they had known the defect at the time of the contract or the date of delivery.

Activity 5.6Why was the yacht in Clegg v Olle Andersson T/A Nordic Marine [2003] EWCA Civ 320 deemed to be of unsatisfactory quality?


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


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


5.7.1 Fitness for particular purposeThere will be a breach of the implied condition in s.14(3):

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

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

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

There will not be a breach where the seller is able to show the buyer did not rely, or that it was unreasonable for the buyer to rely, on the seller’s skill or judgment. If the particular purpose was known to, or foreseeable by, the seller, the reliance of the buyer on the seller is assumed. It is for the seller to show that there was no such reliance or that, if there was reliance, it was unreasonable. The mere fact that the seller is made aware of the buyer’s intention with regard to the goods does not mean that the buyer relies on the seller. For example, it may be that the buyer mentions their intention to export the goods to a particular country, but this does not mean the seller is liable if the necessary import licence is not granted since the seller may have no knowledge of the relevant legal requirements (Teheran-Europe Corpn v ST Belton Ltd [1968] 2 QB 545 (Sealy and Hooley, pp.413-14)).

The seller’s obligation is absolute: a dairy was liable when the presence of typhoid in milk made it unfit for drinking even though there was no suitable test for detecting the presence of the germ (Frost v Aylesbury Dairy Co Ltd [1905] 1 KB 608. See also Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31 (Sealy and Hooley, pp.414-16); Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441). Where there is a string of contracts in which goods are sold and resold, the seller will not escape liability merely because the defect in those goods originated with an earlier party and, therefore, the reliance is on the skill and judgment of that earlier party with whom the buyer has no contractual relationship (Britvic Soft Drinks Ltd v Messer UK Ltd [2002] EWCA Civ 548). Liability can be passed back up the chain: if A sells to B and B sells to C, C can sue B and B can sue A (assuming the elements of liability under s.14(3) are present).

If there is only partial reliance, the seller will be liable in so far as the defect is traced to that aspect. Where a shipbuilder ordered a propeller and specified some of its dimensions, the manufacturer was liable for a defect that originated in the thickness of the blades, which was a matter that had been left to the manufacturer (Cammell Laird & Co Ltd v Maganese Bronze & Brass Co Ltd [1934] AC 402 (Sealy and Hooley, pp.412-13)). If the defect had been within the specifications set out by the shipbuilder, the manufacturer would not have been liable. In Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441, CH, who had no expertise concerning mink food, made up the food according to a formula provided by AP, who were experts in mink nutrition. AP, therefore, did not rely on CH with regard to the formula, but did rely on CH using suitable ingredients. Since the loss was caused not by the formula but by the use of a particular type of herring meal which contained toxin, CH were liable. Crucial to the decision was that this toxin was harmful to other types of animals and that CH were in the business of making animal feed.

As with s.14(2), the fitness of goods for their particular purpose may be linked to the adequacy of the instructions accompanying the goods. In Heil v Hedges [1951] 1 TLR 512, the court took the view that it was common knowledge among consumers that pork needed to be cooked more thoroughly than other types of meat, so a seller could not reasonably foresee that the buyer would not cook it thoroughly and, therefore, the goods were fit for purpose without the need for instructions (see also Balmoral Group Ltd v Borealis (UK) Ltd [2006] EWHC 1900). On the other hand, the buyer of underwear


could not be expected to know that it would require washing prior to wearing in order to remove harmful additives from the cotton (Grant v Australian Knitting Mills Ltd [1936] AC 85). In Wormell v RHM Agriculture (East) Ltd [1987] 1 WLR 1091, instructions on tins containing agricultural weed-killer warned against spraying on crops at a certain stage of crop growth. The farmer thought this was to prevent crop damage and, deciding to take a risk, sprayed throughout the year to little effect. It was held that the weed-killer was fit for its purpose if applied in the right conditions and according to the instructions. There may, however, be some difficulties with this case since the instructions were open to different interpretations. While the principle must be right that the seller can discharge the obligation to provide guidance so that the goods are rendered fit for their purpose, it should also be the case that where the instructions are ambiguous and the buyer adopts a reasonable interpretation which leads them to use the goods wrongly, then they are not fit for their purpose.

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

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

5.7.2 Particular purposeThe particular purpose need not be mentioned by the buyer where the goods normally have only one purpose. For example, a hot water bottle should be fit for filling with hot water and the buyer need not ask if it is (Preist v Last [1903] 2 KB 148). If the goods can be used for several purposes, the buyer must make known to the seller which purpose is intended, otherwise the seller will not be in breach if the goods fulfil one of the purposes (although goods that do not fulfil all of the purposes for which they are commonly supplied may not be of satisfactory quality: s.14(2B)(a)). In Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441, CH purchased herring meal from X. X knew that the herring meal was going to be used for animal feed, but did not know that it was to be used for feeding mink. Did the herring meal have to be fit as animal feed or fit as mink feed? It was held that X knew the herring meal was required for animals and knew, or ought to have known, that herring meal was commonly used in mink feed.

Where the purpose is unusual, then the buyer needs to specify what it is. A tweed jacket must be fit for wearing and there is no need to specify that purpose. If it is bought by someone with unusually sensitive skin who does not make this fact known to the seller, the seller will not be liable for dermatitis contracted by the buyer (Griffiths v Peter Conway Ltd [1939] 1 All ER 685. See also Slater v Finning [1997] AC 473). The outcome would, usually, be the same even if the buyer of the jacket were unaware of their own sensitivity (see Activity 5.7(b)). But should a seller, who is aware that some people will contract dermatitis through wearing tweed, caution all buyers? The court acknowledged the difficulty of drawing a line between ‘abnormality’, of which the seller is not assumed to be aware, and ‘normality’, of which the seller is assumed to be aware. The test may be, what can the seller reasonably be expected to foresee? The answer will depend on the information that the seller has or ought to have acquired both from the buyer and from other sources to which the seller might reasonably be expected to have access (e.g. knowledge circulating within the seller’s trade). Vacwell Engineering Co Ltd v BDH Chemicals [1969] 3 All ER 1681 concerned the sale of a chemical


in glass containers. This chemical would explode on contact with water, but the seller failed to warn the buyer of this danger. The buyer washed the containers and, during this process, one broke leading to an explosion. It was held that this was reasonably foreseeable and the seller should, therefore, have provided a warning. In J Murphy & Sons Ltd v Johnston Precast Ltd [2008] EWHC 3024 (TCC) the buyer ordered a glass pipe without mentioning that it was to be installed into foam concrete and so the seller was not liable when the concrete caused the pipe to break, although if the seller knew or ought reasonably to have known that the use of concrete might create problems for the pipe, they would have been obliged to warn the buyer.

The seller’s knowledge of the purpose and the buyer’s reliance on the skill of the seller are connected, for, as Lord Reid put it, the purpose must be ‘stated with sufficient particularity to enable the seller to exercise his skill or judgment in making or selecting appropriate goods’ (Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31). In that case, Lord Pearce remarked, ‘If a particular purpose is made known, that is sufficient to raise the inference that the buyer relies on the seller’s skill and judgment unless there is something to displace the inference.’ (Sealy and Hooley, p.392).

In Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31 (Sealy and Hooley, pp.414-16), Brazilian groundnut extract was sold by K to G, who resold it to X. X used it in the manufacture of poultry feed, which was sold as feed for pheasants. The latent presence of a fungus in the groundnut extract made the feed poisonous and killed many of the pheasants. On the question of K’s liability, K knew that G intended to resell the extract to a manufacturer of animal feed, but not whether it would be for cattle or poultry. It was held that K must be taken to have asserted that it would be suitable for cattle and poultry and that G relied on K to supply material that was fit for this purpose. K was, therefore, in breach when the extract proved poisonous to both cattle and poultry, even if in differing degrees. If K could have shown that the effect of groundnut extract on poultry was well known, it might have been reasonable for K to assume that a buyer, who bought the extract for animal feed, would not be using it for poultry.

Is this case authority for a broader proposition that where it is foreseeable that the goods may cause a problem it is irrelevant that the extent of the problem actually caused is greater than could have been foreseen? If the feed is unsuitable for all cattle and poultry, is the fact that it is more unsuitable for poultry irrelevant? If it is reasonably foreseeable to a seller that tweed jackets may cause discomfort (but not illness) because of the nature of the cloth, does it follow that the seller will be liable if the buyer contracts dermatitis, which was not reasonably foreseeable to the seller (or the buyer)? There seems no clear solution to these questions.

Activity 5.7a. Distinguish between the requirements that goods be fit for purpose in s.14(2)

and in s.14(3).

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

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

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



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

5.8 Implied terms in sales by sample: s.15


It is a normal practice in some areas of commercial activity for the seller to show the buyer a sample of the goods on sale. A key scene in Thomas Hardy’s novel Far from the madding crowd takes place in the Corn Exchange where Bathsheba fatally impresses Farmer Boldwood with her ability to detect defective grain from a sample shown to her.

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

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

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

is to present to the eye the real meaning and intention of the parties with regard to the subject matter of the contract which, owing to the imperfection of language, it may be difficult or impossible to express in words… But [the sample] cannot be treated as saying more than such a sample would tell the merchant of the class to which the buyer belongs (Drummond v Van Ingen [1887] 12 App Cas 284 (Sealy and Hooley, p.417)).

In other words, differences between the bulk and the sample will be irrelevant unless they would have been detectable from the sample by a reasonable merchant, even if the actual buyer subjected the sample to a more intensive examination (Steels & Busks Ltd v Bleecker Bik & Co Ltd [1956] 1 Lloyd’s Rep 228 (Sealy and Hooley, pp.418-19)).

The goods must comply with the implied conditions in ss.13-14. Under s.14(2C)(c), if the goods are of unsatisfactory quality the seller will not be liable where the defect ‘would have been apparent on a reasonable examination of the sample’. It makes no difference that the buyer has failed to undertake a reasonable examination of the goods (contrast this with the position in relation to sales not by sample: see 5.6.4 above). A buyer who has not previously examined the goods is not deemed to have accepted until they have had a reasonable opportunity to examine them by comparing the bulk with the sample (s.35(2)(b)).


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


5.9 Limitation or exclusion of liability


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

The parties may seek to limit or exclude their liability, but can only do so where the alleged clause is part of the contract, and subject to the Unfair Contract Terms Act 1977 (UCTA). Section 6 UCTA restricts the ability to limit or exclude liability for breach of the terms implied by ss.12-15 SGA. Liability under s.12 cannot be excluded or limited in any contract covered by UCTA. Liability under ss.13-15 cannot be excluded or limited as against someone dealing as a consumer (for the definition of this complex concept, see Sealy and Hooley, p.397) and can only be excluded or limited as against another type of buyer in so far as the clause satisfies the requirement of reasonableness (defined in UCTA, s.11(1), sch.2).

Under s.12(3) SGA, the seller can agree to pass only such title as they have. How can this be distinguished from an attempt to exclude or limit liability, which is not permissible under UCTA? Where the contract is based on the seller having the right of an owner to sell, a clause excluding or limiting liability for fulfilling that obligation will come within the UCTA and will have no effect. It is a fundamentally different proposition if the contract explicitly acknowledges that the seller may have only a limited or defeasible right to sell. In practice, however, the distinction may be difficult to make and it is necessary to approach such issues by looking at the contract as a whole. In relation to s.14(2) and (3), a seller can offer goods on the basis that the buyer takes subject to specified defects. This is also different from selling the goods without pointing out a defect and including a clause purporting to limit or exclude liability for that defect.

In respect of other terms, ss.3 and 17 of UCTA state that where A deals on B’s written standard terms of business, B cannot be reference to a contract term to exclude or restrict liability for breach, or claim to be entitled to render performance substantially different from that which was reasonably expected, or render no performance at all, unless the term satisfies the requirement of reasonableness.

UCTA does not apply where the sale contract is an ‘international supply contract’ (defined in s.26 UCTA).



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

Advise Foxglove of its rights (if any) against Track.


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

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

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

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

Note: the issues above are the main focus of this question and, on the basis of your study so far, they are all you can discuss, but there are other issues. You will see from Chapter 6 that, if there is a breach of an implied condition by Track, there is an issue as to remedies. Can Foxglove reject the rails and claim the return of the price paid together with damages for any loss (for example, damage to the train), or are they limited to an action for damages? See the discussions of s.35 in 6.1 below on acceptance and rejection, and of s.53 in 6.2.4 on the measurement of damages. In relation to the damage to the train, we might ask whether it was being driven at an appropriate speed when it crashed. In other words, was the cause of the crash the defect in the rail or the speed at which the train was driven? If it was the latter, the seller may be not liable for the damage to the train (see Lambert v Lewis [1982] AC 225, discussed in 6.2.4 below).

When you have studied Chapter 6, return to this problem and consider these additional issues.


Reflect and review







Ready to move on


Need to study again

I can explain the duties of the seller to deliver and the buyer to accept goods.

I can discuss the implied terms in ss.12-15.

I can discuss the relationship between the different implied terms.

I can outline the limits imposed on attempts by the seller to exclude or restrict liability for breach of the implied terms.


Must revise

Revision done

5.1 Terms

5.2 Delivery and payment

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

5.4 Implied term as to description: s.13

5.5 Implied terms as to quality: ss.14-15

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

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

5.8 Implied terms in sales by sample: s.15

5.9 Limitation or exclusion of liability


Notes

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

6.1 Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

6.2 Remedies of the buyer . . . . . . . . . . . . . . . . . . . . . . . . . . 111

6.3 Remedies of the seller . . . . . . . . . . . . . . . . . . . . . . . . . . 115

6.4 Retention of title by the seller . . . . . . . . . . . . . . . . . . . . . . 119


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


Introduction

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

For the issues raised in this chapter of the subject guide, in addition to Sealy and Hooley you can consult Bradgate, pp.309-37 and 438-63.


understand the rules on acceptance

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

explain the use of retention of title clauses and the limits of such clauses.

Commercial law Chapter 6 Sale of goods: acceptance, remedies and retention of title page 109

6.1 Acceptance

Essential Reading Sealy and Hooley, pp.473-74.

The buyer loses the right to reject the goods if all, or part, of the goods are accepted, unless the contract permits rejection after acceptance (s.35). Acceptance here means something quite different from the meaning in s.27 (see 4.1 above), and acceptance under s.27 does not mean there has been acceptance under s.35. Having said this, the buyer cannot accept goods if there has been a breach of s.12(1) (the implied condition that the seller has the right to sell: see 5.3). Moreover, the contract may contain express terms regulating the buyer’s right to reject, which will apply in preference to those contained in s.35, subject to the possible application of the Unfair Contract Terms Act 1977 (see 5.9, 6.2.3)

The buyer will have accepted the goods when:

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

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

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

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

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

In Truk (UK) Ltd v Tokmakidis GmbH [2000] 1 Lloyd’s Rep 543, in respect of goods that were sold for resale, it was held that a reasonable time would, usually, be the actual time it took to resell the goods plus a reasonable period within which the sub-buyer could conduct an examination (see also Clegg v Olle Andersson T/A Nordic Marine [2003] EWCA Civ 320; Jones v Gallagher [2004] EWCA Civ 10; Whitecap Leisure Ltd v John H Rundle Ltd [2008] EWCA Civ 429). The assessment of what constituted a reasonable time will also be determined by the complexity of the goods, so more time would be given to examine a nuclear submarine than a bicycle. In Truk (UK) Ltd, Judge Jack QC said:

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

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


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

In that case rejection was permitted nine months after delivery and in Roger v Parish (Scarborough) Ltd [1987] QB 933 six months after delivery. In Fiat Auto Financial Services v Connelly (Sheriff Court (Glasgow)) 2007 SLT (Sh Ct) 111, it was held that the right to reject had not been lost even though the car had been used as a taxi for about 10 months, covering about 40,000 miles, because the buyer had been in regular contact with the seller about the problems with the car and had delayed making a decision whether to accept or reject while awaiting information from the seller. The time period for rejection stopped when the seller first tried to repair the car and did not restart until it had been repaired and returned. (Note Bernstein v Pamston Motors (Golders Green) Ltd [1987] 2 All ER 220 was held no longer to represent the law on this point: Clegg v Olle Andersson T/A Nordic Marine [2003] EWCA Civ 320.)

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

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

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

Finally, even if the goods have been accepted and the right of rejection is lost, the buyer may still have a remedy in damages (s.11(4), 6.2.4), unless the right has been waived (6.2.6).

Activity 6.1a. Jake contracts to buy 12 bottles of brandy and the seller delivers eight bottles of

brandy and four bottles of whisky. What can Jake do under the SGA?

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


6.2 Remedies of the buyer


6.2.1 Rejection of the goodsThe buyer can reject goods where there is:

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

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

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

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

6.2.2 Loss of the right to rejectThe right of rejection is lost or will not be available where:

the contract restricts the right to reject: the Unfair Contract Terms Act 1977 permits a reasonable restriction in contracts involving a non-consumer buyer, including in relation to terms implied by SGA, except that liability for breach of the condition implied by s.12(1) SGA cannot be excluded or limited in any contract (s.6(1) UCTA)

the buyer has accepted the goods (s.11(4); see 6.1 above)

the buyer is not a consumer and the breach of ss.13-15 or s.30 is so slight as to make it unreasonable to reject the goods (s.15A (1) (b); Truk (UK) Ltd v Tokmakidis GmbH (2000) 1 Lloyd’s Rep 543; s.30(2A), (2B))

there is a breach of a warranty, or a breach of an innominate term (where, in the latter, the consequences of the breach are not sufficiently serious to entitle rejection).

6.2.3 Remedies where the buyer has the right to reject

(a) Rejection and repudiation

If the buyer has the right to reject for breach of condition a number of possibilities arise. The buyer can reject the goods (see s.36) and, if appropriate, repudiate the contract and claim the return of the price paid (if any) and damages for any additional loss caused by the breach (see 6.2.4). The right to reject does not necessarily mean the buyer can repudiate the contract. It may be that the contract allows the seller to remedy the fault and re-deliver the goods (Borrowman Phillips & Co v Free & Hollis [1878] 4 QBD 500 (Sealy and Hooley, pp.448-49); The Kanchenjunga [1990] 1 Lloyd’s Rep 391). Where the contract is for the sale of specific goods, it is, of course, not possible for the seller to tender different goods, so the only means of curing a defective delivery would be by the repair and redelivery, assuming this is possible within the time limits set by the contract and the goods conform to the contract.

Repudiation is only possible if the breach goes to the root of the contract and this will be where there is a breach of condition or where there has been a sufficiently serious breach of an innominate term. But certain observations must be made. First, it is important to remember the effect on the implied conditions of ss.15A and 30(2A) on such rights, although these provisions do not affect the rights of the buyer in relation to other conditions or innominate terms (e.g. where the breach relates to a breach of an express term relating to the seller’s obligation to deliver at a particular time). Second, under s.55(1) SGA the parties can agree to exclude liability for breach of the terms implied by the Act, including those in ss.13-15, subject to the application of the Unfair Contract Terms Act 1977 (see 5.9 above). Third, it seems likely that express terms


providing the buyer with the right to terminate the contract will not fall within the Unfair Terms Contract Act 1977, in spite of the potential breadth of ss. 3(2)(b) and 17(1)(b) – the aim of that Act is only to regulate clauses that exclude or limit liability or that grant an indemnity (but in Atiyah, p.498 the authors suggest the 1977 Act may apply here).

The buyer may be able to reject the entire consignment of goods, or accept all the goods that conform to the sale contract and reject those that do not conform, or take some of the defective goods and reject the rest (ss.11(4), 35A(1)). This would seem to apply whether or not the contract is for delivery by instalment (s.35A(2)), in spite of the wording in s.31(2), which refers only to repudiation or a claim for damages, although this possibility was not considered in Regent Ohg Aisenstadt und Barig v Francesco of Jermyn Street Ltd [1981] 3 All ER 327. In this case suits were to be delivered in five instalments; one instalment was delivered one suit short. It was held that the breach was unlikely to be repeated, so the buyer could not repudiate the whole contract.

The rules on rejection concern the contractual rights of the buyer to reject the goods. They do not determine whether property has passed to the buyer. Where the buyer rejects the goods, the property in them revests in the seller (Kewi Tek Chao v British Traders & Shippers Ltd [1954] 2 QB 459 at 487). If the buyer wrongly rejects goods, the seller can treat this as a repudiation of the contract and, if property has passed to the buyer, it will revest in the seller.

(b) Damages

The buyer can treat the breach as a breach of warranty and claim damages (s.11(4); see 6.2.4).

(c) Waiver

The buyer can waive the breach (see 6.2.6).

Activity 6.2Acme agrees to buy from Ecma 1,000 planks of wood for boat building, each plank to measure 15 centimetres in width. When delivered 250 planks are 14 centimetres wide, 250 are 16 centimetres and the rest are as ordered. All the planks are suitable for Acme’s purposes, but Acme has now found an alternative, cheaper supply of wood and wants to escape from its obligations under the contract with Ecma. Advise Acme.

6.2.4 DamagesIn discussing any claim the buyer may have for damages a distinction must be made between a claim for failure to deliver and a claim relating to goods that have been delivered.

Where the failure to deliver causes loss, the buyer can bring an action for damages, whether or not property has passed (contrast with the seller’s remedies: 6.3). The rules are in s.51.

a. If there is an available market for the goods: under s.51(3) the presumption is that the measure of damages is the difference between the contract price and the market price at the time the goods ought to have been delivered or (if no time was fixed) at the time of the refusal to deliver. The fact that the buyer has contracted to resell at a different price from the market price is irrelevant (Williams v Agius [1914] AC 510 (Sealy and Hooley, pp.482-83)). But see the special circumstances of R & H Hall Ltd v WH Pim Junr & Co Ltd (1928) 30 LLR 159, where the parties contemplated that the buyer would resell the particular cargo so that the buyer could not mitigate their loss by substituting a cargo bought in the market. The buyer was awarded loss of profits on the resale. Under s.54, the buyer can claim special damages – that is, the loss arising from particular circumstances of which the seller was aware at the time of the contract (the so-called second limb of the rules on remoteness of damage laid down in Hadley v Baxendale (1854) 9 Ex 341; see Koufos v Czarnikow Ltd (The Heron II) [1969] 1 AC 350).


b. If there is no available market: under s.51(2), the buyer may claim ‘the loss directly and naturally resulting, in the ordinary course of events, from the seller’s breach’. This means that the loss must have been caused by the breach (causation) and have been reasonably foreseeable (remoteness).

Where the goods are delivered and the buyer elects not to reject them (s.11(2)), or where the contract is not severable and the buyer has accepted the goods or part of them (s.11(4), subject to s.35A (see 6.2.2 above)), or where the breach does not give rise to the right of rejection, it is treated as a breach of warranty and the buyer may deduct damages from the unpaid price (and can sue for any further loss caused by the breach: s.53(4)), or bring an action for damages (s.53(1)). The measure of damages is the loss ‘directly and naturally resulting, in the ordinary course of events, from the breach’ (s.53(2)).

In the case of a breach of an implied term the loss is presumed to be the difference between the value at delivery and the value if the warranty had been fulfilled (s.53(3)). Where the circumstances of the case displace the application of this presumption the court applies s.53(2) (Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87 (Sealy and Hooley, p.484)). In general, the market price of the goods is ignored, although that price may indicate the value of the goods if they had conformed to the contract.

The buyer may claim damages for consequential loss if the loss was caused by the breach of contract and was a type of loss that was foreseeable (Hadley v Baxendale; The Heron II) or for which the party in breach must have accepted responsibility (Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48). In GKN Centrax Gears Ltd v Matbro Ltd [1976] 2 Lloyd’s Rep 555, the seller was aware that the buyer was reselling the goods to customers who, if satisfied, would place further orders. The seller was, therefore, liable for the loss suffered when the repeat orders were not forthcoming because of defects in the goods. On the other hand, in Lambert v Lewis [1982] AC 225, the seller of a defective towing coupling was liable for the breach of s.14(3), but not for the damages the buyer had to pay to a third party who was injured when the buyer continued to use the coupling in spite of knowing it was defective. Similarly, where yarn was delivered to the buyer in damaged cartons and that damage must have been obvious to the buyer, the seller was not liable for the additional loss arising from the yarn being shipped by the buyer in those cartons (Commercial Fibres (Ireland) Ltd v Zabaida [1975] 1 Lloyd’s Rep 27). The buyer’s action broke the chain of causation. There is no break in the chain of causation where the buyer is not aware of the defect in the goods that causes the loss, even if the reasonable buyer would have been aware of that defect, as long as the buyer does not ignore what is obvious (Trac Time Control Ltd v Moss Plastics Parts Ltd [2005] All ER (D) 6).

The rule that damages are assessed as at the date of breach might not be applied where overridden by the principle that damages should not exceed the value of the contractual benefits lost by the claimant (Golden Strait Corpn v Nippon Yusen Kubishika Kaisha [2007] UKHL 12). If, at the time of the breach, there is a real possibility of an event happening that would terminate the contract or reduce its benefit, it may be appropriate for the court to reduce the damages to reflect the likelihood of that possibility. Where this event occurred after the breach but before the time came for the assessment of damages, the court should consider what happened and not award damages for the period after the event.

Activity 6.3a. In January, Acme contracts to sell 100 tons of wheat to Ecma at £100 per ton,

delivery on 31 August; Acme is aware that Ecma is buying for resale. In March, Ecma contracts to resell this wheat to Mace at £120 per ton with delivery 31 August and requests Acme to deliver to Mace. Acme fails to deliver. On 3 September, Ecma purchases wheat at £120 per ton to fulfil its obligation to Mace. The market price on 31 August is £90.

Advise Ecma. How might your answer differ if the price in August is £110?

b. How might your answer to (a) differ if there was no delivery date in the contract and on 31 August Acme wrote to Ecma repudiating the contract?


6.2.5 Other remediesA total failure by the seller to deliver will constitute a failure of consideration and will release the buyer from the obligation to pay, or if they have paid, payment can be recovered by a claim for money had and received. Aside from this, delivery and payment are concurrent conditions (s.28), so the buyer may withhold payment where the seller is not ready to deliver the goods. Where the buyer rightly repudiates the contract or the seller wrongfully repudiates, the buyer is entitled to the return of the price paid and the goods are returned as the termination has occurred because of the seller’s breach.

In an action for breach of contract to deliver specific or ascertained goods, the court has the discretion to direct that the contract be performed specifically upon such terms and conditions (if any) as to damages, payment of price, etc, as seem just to the court (s.52). For a case where such an order was made in relation to unascertained goods, see Sky Petroleum Ltd v VIP Petroleum Ltd [1974] 1 WLR 576; but see Re Wait [1927] 1 Ch 606. The general principle is that specific performance will not be ordered if damages are an adequate remedy. This means it is rarely awarded in commercial contracts involving goods traded in the market. The fact that the contract concerns specific goods does not mean that damages will be held to be inadequate. This rather unsatisfactory approach to specific performance means that the buyer may be left to cope with considerable inconvenience for which damages may not be an adequate remedy (for example, Société des Industries Métallurgiques SA v Bronx Engineering Co Ltd [1975] 1 Lloyd’s Rep 465).

Remedies may be available for contractual misrepresentation (rescission; possibly damages: Misrepresentation Act 1967), or in the torts of deceit (Derry v Peek (1889) 14 App Cas 339), negligent misstatement (Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465) or conversion (Torts (Interference with Goods) Act 1977).

6.2.6 WaiverA party (buyer or seller) may waive the right to a remedy for breach. The obligation, which has been broken, may revive later. For example, if the buyer waives the seller’s breach of a promise to deliver on a particular date, they are not expected to wait forever and a new delivery date can be asserted by the buyer giving reasonable notice to the seller (Charles Rickards Ltd v Oppenhaim [1950] 1 KB 616). The revocation of a waiver cannot occur where the other party has changed their position in reliance and cannot now perform as was originally envisaged.

Activity 6.4Jake, a wine merchant, buys a case of wine from a producer. Jake sells this case of wine to a customer, who subsequently complains that on opening one of the bottles it proved to be defective. The customer returns the other bottles, and Jake refunds the purchase price to the customer. Jake now seeks to return the wine to the producer.

Advise Jake.

Study pack reading Adams, J.N. ‘Damages in sale of goods: a critique of the provisions of the Sale

of Goods Act and article 2 of the Uniform Commercial Code’ [2002] Journal of Business Law pp.553-556.

Extract from Bridge, M. Chapter 10: ‘The remedies of the buyer and seller’ from The sale of goods. (Oxford: Oxford University Press, 1998) [ISBN 9780198765355] pp.486-498.



SummaryThe buyer can reject goods for defective delivery, breach of an implied or express condition, or serious breach of an innominate term, unless they have accepted the goods or, in some situations, where there is only a minor breach. Rejection does not necessarily constitute rescission of the contract and it may be possible for the seller to cure a defective delivery. Wrongful rejection may be treated by the seller as repudiation of the contract.

The buyer may be able to withhold payment of the price where the seller fails to deliver, or to bring an action for damages for non-delivery or if the goods are defective (this may be in substitution of, or in addition to, the right to reject). In rare circumstances the court may grant specific performance.

6.3 Remedies of the seller


Where there is a breach by the buyer, the seller may have real remedies (see 6.3.3-6.3.6) and personal remedies (6.3.1-6.3.2). The personal remedies are an action for the price of the goods, or an action for damages for non-acceptance.

6.3.1 Action for the priceAn action for the price is an action in debt, which arises:

if property has passed and the buyer has wrongfully failed to pay according to the terms of the contract (s.49(1)). See Stein, Forbes & Co v County Tailoring Co [1916] 86 LJKB 448 (Sealy and Hooley, pp.432-33); Colley v Overseas Exporters Ltd [1921] 3 KB 302 (Sealy and Hooley, pp.433-35)). The time for payment must have arrived and the buyer must have no right to reject the goods;

if the contract stipulates a date for payment irrespective of delivery and the buyer wrongfully fails to pay (s.49(2));

if risk has passed to the buyer, whether or not property has passed. This is not contemplated expressly by s.49, but see Sealy and Hooley, p.432.

Although, in these situations the buyer could sue for damages (s.50(1)), the action for the price has advantages: it provides certainty about how much the seller is entitled to receive; the remoteness rule (that loss must be reasonably foreseeable) applies only to damages; the seller is not required to show that the breach caused the loss or to mitigate or prove the amount of the loss.

In addition to the action for the price, the seller could bring an action for damages under s.54 in respect of any reasonably foreseeable loss caused by the buyer’s breach. The seller could also claim under s.37(1) for ‘any loss occasioned by [the buyer’s] neglect or refusal to take delivery, and also for a reasonable charge for the care and custody of the goods’.

Activity 6.5Acme agrees to sell one of its machines to Ecma, but property is only to pass when Ecma has unbolted the machine from the factory floor. Ecma fails to unbolt the machine and does not pay Acme.

Can Acme bring an action for the price?

6.3.2 Action for damagesUnder s.50(1), ‘where the buyer wrongfully neglects or refuses to accept and pay for the goods’, the seller will have an action for damages for non-acceptance. This will be the buyer’s only remedy if the property has not passed and it is an alternative remedy


to the action for the price if the property has passed. The measure of damages is the loss ‘directly and naturally resulting in the ordinary course of events, from the buyer’s breach of contract’ (s.50(2)). The loss must have been caused by the breach and be reasonably foreseeable. The seller is obliged to mitigate their loss (for example, by reselling the goods) and cannot claim loss attributable to a failure to mitigate.

If there is a market for the goods the presumption is that the amount of the damages will be the difference between the contract price and the market price at the time when the goods ought to have been accepted, or, if no time was fixed for acceptance, at the time of the refusal to accept (s.50(3)). Where such a price can be determined, the seller does not face the difficulties involved in the rules relating to causation, remoteness and mitigation under s.50(2). If the seller suffers loss because of the buyer’s wrongful delay in accepting the goods, there will be an action for damages under s.37 (see 6.3.1).

Finally, where the buyer is in breach and is liable in damages, but those damages are less than the amount of a payment already made by the buyer, the court will deduct the amount of damages from the payment (Dies v British International Mining [1939] 1 KB 724), unless the parties agreed in their contract that the payment was non-returnable (‘a payment by way of earnest’).

Activity 6.6Acme agrees to sell a particular machine, collection to be made by Ecma. Ecma never collects the machine and does not pay.

Advise Acme.

6.3.3 Rights of the unpaid sellerAn unpaid seller is a seller to whom the whole of the price has not been paid or tendered (s.38(1)). Generally, the reason for this is irrelevant: for example, it does not matter that the time for payment has not arrived. Accepting payment by a negotiable instrument (for example, a cheque or bill of exchange) will, usually, operate as a conditional payment and the unpaid seller’s rights will be suspended until the negotiable instrument is not paid (for example, the bank refuses to pay because the customer does not have sufficient funds: s.38(2)).

The seller’s action for the price or for damages is a right in personam, that is, it is a right against the buyer under the contract. But the unpaid seller may also have certain rights in rem, which are exercised directly against goods. These are contained in ss.39-48 and are discussed in the next parts of this guide. The rights can be exercised even though the property in the goods has passed to the buyer (s.39(1)), although not where delivery has been made to the buyer (but see 6.4). Note that merely being an unpaid seller does not mean that all of these rights arise. For example, the unpaid seller’s lien will only arise if the seller is in possession of the goods (see 6.3.4 below).

6.3.4 Unpaid seller’s lienThe unpaid seller’s lien is the right to retain possession of the goods until payment, even if property has passed to the buyer. It provides a defence to an action brought by the buyer for failure to deliver the goods. The property in the goods does not return to the seller, although there is a separate right of re-sale (see 6.3.6 below).

The lien is available where an unpaid seller is in possession of the goods and (s.41(1)):

the goods have not been sold on credit, or

the goods have been sold on credit and the term of credit has expired, or

the buyer has become insolvent: that is, the buyer has either ceased to pay their debts in the ordinary course of business or cannot pay their debts as they become due: s.61(4).

Where some of the goods have been delivered, the lien may be exercised against the undelivered part, unless that delivery indicates an agreement to waive the lien (s.42).


In a contract where the parties agree that delivery is to be made in instalments, the unpaid seller can claim a lien over any part of the goods and not just that instalment on which payment is due (see re Edwards, ex parte Chambers (1873) 8 Ch App 289).

The lien is not lost in any of the following circumstances.

Where part of the price has been paid (s.38(1)(a)).

Where the seller has obtained judgment for the price of the goods (s.43(2)).

Where the seller is in possession of the goods as agent or bailee for the buyer (s.41(2)), although holding as such may amount to evidence that the seller has waived the lien.

Where there has been a disposition by the buyer (for example, sale), unless the seller assented to it in such a way as to show an intention to renounce rights against the goods (s.47(1); Mordaunt Bros v British Oil and Cake Mills Ltd [1910] 2 KB 502 (Sealy and Hooley, p.441); DF Mount Ltd v Jay & Jay (Provisions) Co Ltd [1960] 1 QB 159 (Sealy and Hooley, p.442)).

The lien will be lost:

where the buyer has paid or tendered the whole of the contract price (s.38(1)(a))

where the seller delivers the goods to a carrier, bailee or custodier for transmission to the buyer without reserving the right of disposal (s.43(1)(a); see s.32(1) and 5.2.2)

where the buyer lawfully obtains possession of the goods (s.43(1)(b)). The lien does not revive if the seller regains possession (Valpy v Gibson (1847) 4 CB 837 (Sealy and Hooley, pp.439-40)), unless this occurs as the result of an exercise of the right of stoppage in transit (see 6.3.5). The lien subsists if the buyer wrongfully takes the goods (and the buyer will not be able to pass title under s.25(1), see 4.8.5 above)

by waiver of the lien (s.43(1)(c)), such as consenting to resale by the buyer (s.47(1)). It may be that consent here is as broadly interpreted as in s.25(1) (see 4.8.5 above), which would mean it includes the contradictory notion of consent obtained by deceit

if the document of title to the goods has been lawfully transferred to a new buyer, who takes in good faith (s.47(2)).

Activity 6.7Find five cases where the lien has been lost and comment on the reasons.

As this is a research question, no feedback is provided for this activity.

6.3.5 Right of stoppage in transitIf the buyer of goods is insolvent and the goods have not been delivered, the unpaid seller may exercise the right of stoppage by taking possession or by giving notice of the claim to the carrier, bailee or custodier to whom they have been delivered for the purpose of transmission (ss.44-46). The method of stoppage is outlined in s.46.

The requirements are that:

the seller is unpaid (see 6.3.3 above)

the buyer is insolvent

the goods are in transit.

The transit ends and the right of stoppage is lost:

if the buyer or their agent obtains delivery before the arrival of the goods at their destination (s.45(2); Reddall v Union Castle Mail Steamship Co Ltd [1914] 84 LJKB 360 (Sealy and Hooley, pp.445-56))

if, after arrival at the destination, the carrier, bailee or custodier acknowledges to the buyer that the goods are held on their behalf and that person continues in possession for the buyer (s.45(3))


if the carrier (etc.) wrongfully refuses to deliver the goods (s.45(6))

if a document of title has been transferred to the buyer and there has been a further disposition, for example, to a new buyer, who acts in good faith (s.47(2)).

The transit will not have ended:

if there has been part delivery – the remainder of the goods may be stopped in transit, unless that delivery has been made under such circumstances as to show an agreement to give up possession of the whole of the goods (s.45(7))

if the buyer rejects goods and the carrier (etc.) continues in possession of them (s.45(4)).

Although s.32(1) states that delivery to a carrier is presumed to constitute delivery to the buyer (see 5.2.2), this does not apply in respect of the right of stoppage. Only actual delivery to the buyer or to a carrier who is acting as the buyer’s agent will terminate the right (see s.45(1), 45(5)).

Under the Regulation of Investigatory Powers Act 2000 (s.1) it is illegal to intercept communications transmitted by a public postal service, except if undertaken with the authority of a warrant or in the circumstances set out in s.3.

6.3.6 Rescission and resaleA contract of sale is not rescinded by the exercise of the rights of lien or stoppage (s.48(1)). Indeed, the buyer may be able to require delivery on tendering payment of the price. Furthermore, where the property in the goods has passed to the buyer, it will not revest in the seller merely because they exercise the right of lien or stoppage. Property will revest if the seller terminates the contract or exercises the right of resale. In RV Ward Ltd v Bignall [1967] 1 QB 534 (Sealy and Hooley, pp.447-50), the court took the view that the seller resold the goods as their owner, and that the revesting of property in the seller occurred as a result of rescission of the contract following the buyer’s breach. The seller’s election to rescind was made by the act of reselling the goods.

The right of resale arises:

a. where the seller expressly reserves that right in the event that the buyer defaults, in which case the original sale contract is rescinded (s.48(4));

b. where an unpaid seller, who has exercised the right of lien or stoppage, resells (by implication of s.48(2)). The seller may also claim damages for loss caused by the breach;

c. where there is an unpaid seller, and either the goods are perishable or the seller gives notice of the intention to resell, and the buyer does not pay or tender the price within a reasonable time (s.48(3));

d. where the buyer repudiates the contract and the seller accepts this repudiation. If property has passed to the buyer, refusal to accept delivery and to pay will amount to repudiation, which, if accepted, means the property will revest in the seller, who may resell and sue the buyer for any loss arising from the breach. Where the seller does not accept the repudiation, the right to resell will only arise if one of the circumstances mentioned in (a)-(c) is present.

The unpaid seller may resell the goods and recover from the original buyer damages for any loss caused by this breach. The consequence of the re-sale by the unpaid seller is that the new buyer acquires a good title as against the original buyer (s.48(2)).

Note that the use of the word ‘rescission’ in the Act does not conform to modern judicial thinking, as set down in Johnson v Agnew [1980] AC 367, where the House of Lords distinguished between: (a) recission ab initio for invalidity, such as fraud or mistake, which means, in effect, the transaction is entirely unwound so that money and goods are returned to the parties; (b) termination of the contract following breach, which does not affect the past or accrued claims, but merely gives rise to claims for damages for the breach and ends obligations to perform in the future.


6.3.7 WaiverSee the discussion at 6.2.6 above.

Activity 6.8Why was the seller unable to exercise the seller’s lien in Valpy v Gibson [1847] 4 CB 837?

Useful further reading Adams, J. N. ‘Damages in sale of goods’ [2002] JBL 553.

Atiyah, pp.479-94, 447-78.

SummaryThe seller can bring actions against the buyer for price where property has passed and the buyer has wrongfully failed to pay, or for damages where the buyer wrongfully fails to accept and pay for the goods. The seller may also have rights in relation to the goods: the unpaid seller’s lien permits the seller to retain possession of the goods until payment; the right of stoppage allows the unpaid seller to stop goods in transit where the buyer has become insolvent; and the seller may be able to exercise the right of resale.

6.4 Retention of title by the seller


It is normal commercial practice for goods to be supplied on credit: a manufacturer may need to sell the goods they have produced before being able to pay a supplier of the raw materials. This can create problems for the supplier because if the buyer becomes insolvent before payment and after property in the raw materials has passed, they become part of the buyer’s general assets and the seller will simply rank alongside other unsecured creditors, which will involve expense in lodging proof of a claim and may yield little or no benefit.

To some extent the seller can guard against this possibility by not passing the property in the goods to the buyer. If the parties do not intend the property to pass, it will not do so, even if the buyer obtains possession (s.17; Tank and Vessels Industries Ltd v Devon Cider Co Ltd [2009] EWHC 1360 (Ch)). Commonly, the sale contract seeks to assert this by a retention (or reservation) of title clause in the sale contract. This is sometimes called a Romalpa clause after the leading case, Aluminium Industrie Vaasen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676 (Sealy and Hooley, pp.452-56)). Such a clause is contemplated by s.19(1) (see also ss.2(3) and 17). Where there is a contract for sale of specific goods or where, in a contract for unascertained goods, the goods have been appropriated to the contract, the seller may reserve the right of disposal of the goods until such conditions as are laid down in the contract have been fulfilled (for example, payment of the price). Property will not pass to the buyer until the conditions are met, even if the goods have been delivered. Such a clause aims to prevent the goods becoming part of the buyer’s assets in the event of insolvency. Moreover, since the goods are not the property of the buyer they will not be subject to any security granted to another creditor by the buyer. But, while these attributes make the clause attractive to the seller, they can disadvantage other creditors who may be unaware that goods in the possession of the buyer are subject to such a clause.

There is an important distinction to be made between:

a retention of title clause by which the seller retains property in the goods and the goods do not form part of the buyer’s general assets on insolvency

a charge by which the buyer, who has property in the goods, grants to the seller a proprietary interest in them as security for a debt. Here the seller can look to those goods in the event that the debt is unpaid. But where a company is the debtor the charge will be void against creditors unless registered under the Companies


Act 2006, s.860 (by s.878 charges over goods must be registered). In addition, by creating a charge the debtor company may be in breach of agreements with other creditors. For a clause that only created a charge, see Re Bond Worth Ltd [1980] Ch 228 (Sealy and Hooley, pp.458-62).

A retention of title clause provides only limited protection. If the buyer, who is in possession of the goods or documents of title, resells, the new buyer may acquire good title under s.25.

Types of clauses

It is relatively easy to write a clause into a sale contract by which the seller retains property in the original goods, but it may be that the only way the buyer can pay for the raw materials is to manufacture them into a product which is sold. The seller of steel to a carmaker will be aware that some of that steel will be stored for later use and some will be mixed with other goods (plastic, rubber, etc.) to make cars and the cars will be sold. It may not be in the interests of the seller, who wishes to be paid, to obstruct the ability of the buyer to use the goods, but if it is contemplated that before payment the goods will lose their identity or leave the possession of the buyer, how can the seller protect their position?

Attempts have been made to draft clauses that transfer the seller’s rights in the goods sold to any product made with those goods or any money received from the sale of the goods or the product. There are several possibilities.

i. A clause by which the seller retains property in the original goods.

ii. A clause that gives the seller proprietary rights to the proceeds of the resale of the original goods by the buyer.

iii. A clause that gives the seller proprietary rights in the product manufactured by mixing the original goods with other goods.

iv. A clause giving the seller proprietary rights in the proceeds of the sale of any product manufactured with the original goods.

v. An ‘all moneys’ clause (Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339), which reserves the seller’s property in the original goods supplied and, perhaps, rights in the proceeds of resale, the manufactured product and the proceeds of the sale of the manufactured product until all the debts owed by the buyer to the seller (that is, not just the price owed for one particular sale) are met.

These clauses often also require the goods to be stored separately from other goods in the possession of the seller, permit the seller to enter the buyer’s premises and remove the goods in which the seller has property, require the buyer to keep the proceeds of any resale in a special account separate from other funds, and purport to place the buyer under a fiduciary duty to the seller.

Are these clauses successful?

The clauses have, generally, been effective in reserving title to the original goods, but failed in so far as they have sought to extend the rights of the seller beyond the goods supplied under the particular contract. As shown in Fairfax Gerrard Holdings Ltd v Capital Bank Plc [2007] EWCA Civ 1226, it is often the case that even though goods are sold subject to a retention of title clause it is evident that the intention was to permit the buyer to resell those goods. As Simon Brown J pointed out in Four Point Garages v Carter (1985) 3 All ER 12, it would be curious if no such implied right existed in a contract where there is a simple retention of title clause where the purpose of the transaction is to enable the buyer to obtain goods for resale. This reasoning led the court in Re BA Peters plc [2008] EWHC 2205 (Ch) to conclude that the seller had relinquished the property in the goods and had a mere charge, which was unenforceable because it had not been registered.

The problem is that once the goods have been resold or a new product has been manufactured out of the goods the attempt to reserve title in the resale proceeds


or the product is, usually, characterised as a charge (Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25 (Sealy and Hooley, pp.462-63)). It has been suggested that ‘where the contract seeks to confer upon the seller a right to look for satisfaction of the price to property which is worth more than that amount (or to a sum of money which exceeds the price which he is owed), the courts will construe the transaction as one involving a charge’ (Sealy and Hooley, p.458). Attempts to transfer to the seller property in the product manufactured from the original goods will amount to a charge because ‘it is hardly credible that the parties would have intended that the buyer should abandon to the seller the value which he has added to the original sale goods’ (Sealy and Hooley, p.458). There are other issues: has the retention clause been incorporated into the sale contract; can the seller identify the goods that are subject to the clause?

Where goods are mixed with other goods in a manufacturing process, the seller will be able to retain title as long as the identity of the goods sold remains. In Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd [1984] 1 WLR 485 (Sealy and Hooley, pp.465-66)) the contract involved engines which were then used in the manufacture of generators. It was held that the seller retained title to the engines because the process could be easily reversed so the engines had not lost their identity. Where the manufacturing process cannot be easily reversed, property will pass to the buyer and the clause will create a mere charge (Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25 (Sealy and Hooley, pp.462-63)): for example, leather made into handbags (Re Peachdart Ltd [1984] Ch 131 (Sealy and Hooley, pp.463-64)). In an Australian case, Associated Alloys Pty Limited v Metropolitan Engineering and Fabrications Pty Limited (1996) ACSR 205 at 209, it was said:

The question of whether goods which have been used in some manufacturing process still exist in the goods produced by that process, or have gone out of existence on being incorporated in the derived product is, in my opinion, a question of fact and degree not susceptible of much exposition. When wheat is ground into flour it is reasonably open to debate whether the wheat continues to exist; when flour is baked into bread there could be little doubt that the flour does not. Many examples might be encountered or imagined and each must be addressed separately. Where goods of a homogenous character are mixed, co-ownership might be a correct conclusion... whether goods are reducible to the original materials is not simply a matter of physics. Other perspectives have to be considered, including the economic perspective. The scraps of leather produced by cutting up a manufactured shoe could not in reality be regarded as the original leather from which the shoe was manufactured. The steel which would be produced by cutting up the pressure vessel and flattening and the cylindrical parts would not be the steel which Associated Alloys delivered under the sale; it would be scrap steel.

An ‘all moneys’ clause may not resolve the difficulties. In Aluminium Industrie Vaasen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676 (Sealy and Hooley, pp.452-56) the court held the clause effective to enable the seller to trace into the proceeds from sales of the goods by the buyer and found that there existed a fiduciary relationship between seller and buyer, which is necessary to establish tracing in equity. This aspect of the decision has been doubted and in later cases courts have imposed constraints making such clauses ineffective. At the core of the difficulties is that the parties cannot designate the buyer as a fiduciary or as an agent where in reality they are engaged in a sale (Re Andrabell [1984] 3 All ER 407; Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd [1984] 1 WLR 485 (Sealy and Hooley, p.465-66); E. Pfeiffer Weinkellerei-Weinenkauf GmbH v Arbuthnot Factors Ltd [1988] 1 WLR 150; Compaq Computers Ltd v Abercorn Group Ltd [1991] BCLC 484 602).

Activity 6.9Why might it be important for the seller to reserve title rather than merely to have a charge over the goods? How might this distinction affect the buyer?


Webb, D. ‘Title and Transformation: Who Owns Manufactured Goods?’ (2000) JBL 513.


SummaryWhere goods are sold on credit, the seller may seek to guard against the insolvency of the buyer by a retention of title clause. The aim of this is to prevent property from passing to the buyer until the conditions set out in the clause have been met (payment by the buyer), even though there has been delivery of the goods to the buyer. The clause may also purport to give the seller a proprietary interest in the proceeds of sale of the goods, and, if the goods are to be mixed with other goods in a manufacturing process, the seller may attempt to extend the clause to the manufactured product and the proceeds of the sale of that product. The further these clauses seek to extend the rights of the seller over things other than the original goods, the less chance there is of them succeeding. Where the buyer has acquired the property in the goods, the proprietary interest created by the clause will constitute a charge over the goods or proceeds of sale, which will require registration. The other difficulty is that someone purchasing from a buyer, who is in possession of the goods, may acquire title in spite of the retention of title clause in the original sale contract.

Sample examination question For some years Hot Steel Ltd (Hot Steel) has sold steel to Canz Ltd (Canz), which sells some of the steel to other companies and uses the rest in the manufacture of metal containers for sale to various companies in the food trade. The dealings between Hot Steel and Canz have been on the basis of payment 30 days after delivery, but Hot Steel has heard rumours that Canz is facing financial problems. Hot Steel is, therefore, concerned about receiving payment for future deliveries.

How might Hot Steel protect itself by using a retention of title clause?


In effect, this question is asking about the dangers posed to Hot Steel by sales on credit because this enables you to consider how effectively Hot Steel can protect itself.

You might begin your answer by explaining what a retention of title clause is; what, in general terms, it seeks to achieve; the basis of such a clause in the Act (ss.17, 19); the difficulties of distinguishing between a clause that reserves title to the seller and one that merely creates a charge over the goods; and why the distinction is important. All of this will enable you to discuss the value of such a clause to Hot Steel. You would then go on to discuss the effectiveness of the different types of clause in relation to the original goods still in the possession of Canz, the proceeds of the sale of those goods to other companies, the product manufactured using those goods (metal containers), the proceeds of the sale of a manufactured product and an ‘all moneys’ clause, which reserves the seller’s property in the original goods supplied (and, perhaps, rights in the proceeds of resale, the manufactured product and the proceeds of the sale of the manufactured product) until all the debts owed by the buyer to the seller (i.e. not just the price owed for one particular sale) are met. You should note that these clauses often:

require the goods to be stored separately from other goods in the possession of the seller

permit the seller to enter the buyer’s premises and remove the goods in which the seller has property

require the buyer to keep the proceeds of any resale separately and place the buyer under a fiduciary duty to the seller.

You should discuss the legal viability of each of these clauses by reference to relevant case law. Sometimes the discussion can be clarified by distinguishing a case where the clause was effective (for example, Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd) from a case where it was not effective (Re Peachdart Ltd), although with most of these clauses there are no cases in which the clause has been upheld. Note that students often begin their answer to this type of question with a discussion of the seller’s other rights against the buyer. This wastes time because the question directs you to discuss retention of title clauses and not other rights or remedies the seller may have.


Reflect and review







Ready to move on


Need to study again

I understand the rules on acceptance.

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

I can explain the use of retention of title clauses and the limits of such clauses.


Must revise

Revision done

6.1 Acceptance

6.1 Remedies of the buyer

6.2 Remedies of the seller

6.3 Retention of title by the seller


Notes

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

7.1 Documents and contracts . . . . . . . . . . . . . . . . . . . . . . . . 127

7.2 fob contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

7.3 cif contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

7.4 Ex-works, ex-ship and fas contracts. . . . . . . . . . . . . . . . . . . . 136

7.5 Electronic ‘documentation’ . . . . . . . . . . . . . . . . . . . . . . . 137

7.6 An international law of international sales? . . . . . . . . . . . . . . . 137


7 International sale contracts


Introduction


If the sale contract contemplates the export of goods a number of transactions and legal issues arise.

The contract of sale. Where English law governs the sale, the rules apply as in domestic sales, including the Sale of Goods Act 1979 and the general law of contract, although certain rules are disapplied (for example, Unfair Contract Terms Act 1977 – see s.26). The Sale of Goods Act, which is unsatisfactory with respect to purely domestic sales, is woefully deficient when it comes to international sales. For instance, the basic presumptions that delivery and payment will happen concurrently (s.28 SGA) and that property and risk will pass together (s.20 SGA) pose difficulties where the parties are some distance apart and goods are in transit between them.

The contract for the carriage of the goods. Although mentioned in this chapter, this is outside the scope of this course.

Insurance of the goods. Again, this will only be mentioned in passing, but otherwise is not part of the course.

The use of agents. Major companies will have export departments, but most exporters and foreign buyers will use independent agents. There are also likely to be other agents working for the carriers, such as stevedores, who load and unload cargo.

Payment. It may be difficult for the seller to assess the creditworthiness of the buyer, who is in a different country, and the seller may be reluctant to let property or possession of the goods pass to the buyer without payment. The buyer, on the other hand, may be unwilling to pay until the goods are delivered. Chapter 8 will look at some of the payment methods.

Jurisdiction. Claims under any of these contracts may have to be brought in a jurisdiction that is unfamiliar, has a more burdensome procedure or involves difficulties in enforcing judgments. This course will not consider these issues, but you should recognise that the fact of the parties choosing a particular legal system, such as English law, to govern their contract does not mean that another country’s courts (or even the English courts) will observe that choice.

In this chapter two main types of contract will be discussed: fob (‘free on board’) and cif (‘cost, insurance, freight’) contracts.


identify the key characteristics of cif and fob contracts

analyse the distinctions between cif and fob contracts

discuss the duties of the seller and buyer under cif and fob contracts

explain the remedies available to the seller and buyer under cif and fob contracts

understand the general issues involved in the use of electronic documentation and the effect of international agreements on the terms of international sale contracts.

Commercial law Chapter 7 International sale contracts page 127

7.1 Documents and contracts

Some of the problems in international sales have been tackled by the development of documents that, in many circumstances, represent the goods themselves so that delivery of the documents constitutes delivery of the goods.

These are the key documents (see 7.3.3).

Bill of lading (Sealy and Hooley, p.490). Goods will normally be delivered by the carrier to the holder of the bill. Legislation enables a later holder of the bill to enforce its terms against the carrier, in spite of the lack of privity of contract.

Commercial invoice, which itemises the goods sold and identifies them.

Policy of insurance, which covers the goods during transit and which will be assigned when the bill of lading is transferred from one holder to another so that the subsequent holder of the bill can claim on the insurance against the insurer.

There will, usually, be various other documents stipulated in the sale contract: for example, a certificate of origin and a certificate of quality.

The two main types of contract discussed in this chapter are fob (‘free on board’) and cif (‘cost, insurance, freight’) contracts.

fob contract: the seller puts goods on board a ship nominated and paid for by the buyer. A fob contract is described by the port of shipment: for example, ‘fob Liverpool’ indicates that the goods are to be loaded in Liverpool. The seller meets all the expenses of delivering the goods over the ship’s rail, but the buyer meets subsequent costs. Once the loading obligation has been fulfilled the property in the goods and the risk of loss usually pass to the buyer. Where the seller has arranged the contract of carriage the benefit of this will be transferred to the buyer.

cif contract: the seller sells goods, which they shipped or which they acquired while in transit, and promises that the goods will be delivered to a particular port. A cif contract is described by the port of destination: for example, ‘cif Liverpool’ indicates that the goods are to be delivered to Liverpool. The seller transfers to the buyer the contract for the carriage of goods and the policy of insurance. In practice, there is often a string of sale contracts, so that the buyer may resell goods during transit and transfer the documents to a new buyer, and that buyer may sell them on, and so forth. Normally, property does not pass on shipment but risk does. As with fob contracts, the seller makes no promise that the goods will arrive safely and only provides the buyer with the means to bring claims against the carrier or the insurer. But, unlike the fob contract, the cost of freight and insurance are included in the price charged to the buyer by the seller.

In discussing the differences between cif and fob contracts, Lord Mance (Scottish & Newcastle International Ltd v Othon Ghalanos Ltd [2008] UKHL 11) recognised that there was a good deal of flexibility between the different categories of contract, which allowed the parties to vary terms. Having said that, he identified three general distinctons.

1. A fob contract specifies a port for the shipment of the goods (but note that cif contracts may also specify the shipment port and fob contracts may specify the destination).

2. The shipment must be at the port specified, so goods cannot be acquired afloat by the seller (generally cif contracts allow this, but note that the parties can agree to the contrary).

3. A cif contract involves an all-in quote by the seller who, therefore, carries the risk of an increase in the cost of carriage, while in a fob contract changes in freight rates would be met by the buyer (but note that the contract may stipulate that the cif buyer pay for increases in these costs).

It has been suggested that this last factor was critical in the House of Lords determining that the contract in the case was a fob contract.


This outline of the key characteristics is a little misleading since there are almost endless variations of each type. Indeed, it is sometimes difficult to determine whether a contract is fob or cif: Roskill LJ observed that ‘a true f.o.b. or a true c.i.f. is a comparative commercial rarity. Contracts vary infinitely according to the wishes of the parties to them’ (The Albazero [1977] AC 774 at 809). This raises a problem because the parties’ rights and obligations under the two contracts are different. It is a matter of contract construction and, therefore, a matter of law for the court to determine whether a contract is fob or cif. In reaching this determination the terminology used by the parties will be indicative but not conclusive: the court will look at the substance of the agreement (The Parchim [1918] AC 157). Where a contract is of a particular type, but includes a clause contrary to the fundamental nature of that type of contract, the court will sever the clause. For example, where a term in a cif contract stated the goods were at the risk of the seller until delivery, the court disregarded that term (Law and Bonar v British and American Tobacco Co Ltd [1916] 2 KB 605).

For an outline of the other types of contracts, see Sealy and Hooley, pp.492-94.

Study pack reading Extracts from Arnhold Karberg & Co v Blyth, Green, Jourdain & Co [1915] 2 KB 379

and Arnhold Karberg & Co v Blyth, Green, Jourdain & Co [1916] 1 KB 495.

7.2 fob contracts


7.2.1 DefinitionThe letters ‘fob’ stand for ‘free on board’: the seller must place the goods on board a ship, which has been nominated by the buyer, during the period stipulated in the contract. The goods must conform to the contract and the seller pays the loading charges.

Discussed below are the duties of the seller and buyer, but it must be noted that in their contract the parties may vary these. In particular, it is necessary to establish whether, in shipping the goods, the seller acts as principal or as agent for the buyer.

Activity 7.1a. What are the functions of a bill of lading?

b. In Pyrene Co Ltd v Scindia Steam Navigation Co Ltd [1954] 2 QB 402 (Sealy and Hooley, pp.495-98), Devlin LJ identifies three different types of fob contract. What are they and how does he distinguish between them?

7.2.2 Duties of the sellerThe seller is obliged to deliver the goods to the place of loading and load them on the vessel agreed by the parties or designated by the buyer (which of these applies will depend on the terms of the sale contract) and at the time agreed. Failure to do so is a breach of condition. In CTI Group Inc v Transclear SA [2008] EWCA Civ 856, T’s supplier refused to supply the cement, which T intended to deliver under the fob contract, and T was unable to find alternative suppliers. The court held the contract was not frustrated – the seller had not stipulated the supplier and had taken the risk that it might be unable to fulfil its obligation.

The seller is not liable where the failure to deliver at the agreed time is caused by the buyer’s breach of their obligation to nominate a ship (FE Napier v Dexters Ltd [1926] 26 Ll L Rep 184). The seller’s obligation only relates to loading and not the time at which the goods arrive at their destination. This is a ‘classic’ fob contract (Pyrene Co Ltd v Scindia Steam Navigation Co Ltd [1954] 2 QB 402, Devlin LJ (Sealy and Hooley, pp.469-71)). In another type of fob, the contract obliges the seller to nominate the ship, and


a third type involves the seller loading the goods and then giving the mate’s receipt for the goods to the buyer, who exchanges this for the bill of lading. The seller usually pays the charges of loading the goods to the ship’s rail. This is not the case where the carrier loads the goods and includes the charge for this in the cost of freight, which is payable by the buyer.

Where there is a classic fob, unless otherwise authorised by the buyer, the seller must make ‘such contract with the carrier on behalf of the buyer as may be reasonable having regard to the nature of the goods and the other circumstances of the case’. Failure to do so means that, if the goods are lost or damaged, the buyer can decline to treat the delivery to the carrier as delivery to the buyer or may hold the seller liable in damages (s.32(2)). This is the case even if the loss is not caused by the seller’s omission. The reasonableness of the contract is assessed at the time of the contract of carriage, not the time of the sale.

The seller must provide the information necessary for the buyer to insure the goods. Failure to do this means the risk of loss will not pass to the buyer (s.32(3) SGA). This is not usually a difficulty because, if the buyer is required by the contract to nominate the vessel and stipulate the date of loading (see section 7.2.3 below), they will usually have sufficient information without notification by the seller (Wimble Sons & Co v Rosenberg [1913] 3 KB 743).

The goods must conform to the express and implied terms of the contract. In particular, they must correspond with their contractual description, which may include the packing and the date of shipment. For example, ‘fob, Liverpool, October shipment’ means there will be a breach if shipment is made from Belfast or is not made until November (Bowes v Shand [1877] 2 App Cas 455). In the absence of any inconsistent term, a term under s.14(2) Sale of Goods Act 1979 is implied into an fob contract that the goods will be of satisfactory quality when delivered to the vessel and for a reasonable time thereafter (KG Bominflot Bunkergesellschaft Fur Mineralole mbh & Co KG v Petroplus Marketing AG [2009] EWHC 1088 (Comm)). What constitutes a reasonable time depends on the particular contract and the knowledge of the seller as to the purpose of the buyer (e.g. is the intention to use the goods or to sell them on?). Since the contract of sale contemplates carriage by sea the implied term that the goods must be fit for their particular purpose requires that the packing is suitable for a normal voyage (George Wills & Sons Ltd v Thomas Brown & Sons [1922] 12 Ll L Rep 292).

The seller must tender to the buyer the documents stipulated in the contract. The seller need only deliver the documents on receipt of payment (s.28 SGA), unless the parties agree otherwise. The buyer may reject documents that are not in order. The obligations of the seller are the same as under cif contracts (see 7.3 below).

7.2.3 Duties of the buyerIn the ‘classic’ fob (see 7.2.2 for the other variations) the buyer nominates the ship on to which the goods are to be loaded and gives sufficient notice of the nomination to enable the seller to deliver the goods to the ship within the contractual shipment period (the period during which the goods must be loaded). The ship must be capable of receiving the goods. This obligation is a condition precedent to the duty of the seller to load: in other words, the seller’s duty does not arise unless the buyer fulfils the condition. A stipulation as to the time of nomination will normally be of the essence of the contract, so breach will entitle the seller to treat the contract as repudiated. The contract will, usually, designate the port of loading, failing which the buyer will nominate. Where the contract requires the seller to nominate the port, they must give the buyer reasonable time to nominate a vessel. If a nomination is ineffective, the nominating party may make a fresh nomination within the time limits specified by the contract. (See J & J Cunningham Ltd v Robert A. Monro & Co Ltd [1922] 28 Com Cas 42; Bunge Corpn v Tradax Export SA [1981] 2 All ER 513.)

The buyer must accept delivery of the goods within the shipment period. The buyer must pay the price of the goods. Where payment is by letter of credit (see Chapter 8), unless there is contrary agreement, the seller can require a conforming letter of credit


before loading (Glencore Grain Rotterdam BV v Lebanese Organisation for International Commerce [1997] 1 Lloyd’s Rep 578). It is likely to be inferred that the parties do not intend property in the goods to pass unless conditions as to payment are met. The buyer usually pays costs arising after the goods have crossed the ship’s rail, including the cost of stowing the goods on board (unless the contract is ‘fob stowed’ in which the seller stows the goods) and freight (the cost of carriage).

7.2.4 Passing property and risk Re-read the discussion of the rules on passing of property in sale contracts

discussed in Chapter 4.

In brief, property cannot pass in unascertained goods (s.16), except in certain circumstances where the goods are in bulk (s.20A); otherwise property passes in accordance with the intention of the parties (s.17), which if not expressed, will be determined by the rules in s.18.

In fob contracts, risk almost invariably passes to the buyer as the goods cross the ship’s rail, even though property may not have passed (Inglis v Stock [1885] 10 App Cas 263). This may mean that during loading part of the cargo on the shore side remains at the risk of the seller, while those goods that have passed over the rail are at the risk of the buyer. Risk may not pass where the seller fails to provide sufficient information to enable the buyer to insure the goods (s.32(3)), or where the seller’s contract with the carrier is not reasonable having regard to the nature of the goods or the relevant circumstances (s.32(2)). Regardless of whether risk has passed to the buyer, the implied terms of satisfactory quality (s.14(2); see 5.6 above) and fitness for particular purpose (s.14(3); see 5.7 above) are likely to require that the goods can sustain a voyage of the type contemplated by the parties.

In an fob contract the property in the goods will not, normally, pass before shipment and it is presumed that the intention of the parties is that the property passes at the same time as risk. Loading may operate as unconditional appropriation under s.18, rule 5 (see 4.5.6; Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd’s Rep 240). Where the seller is acting as agent for the buyer in arranging the shipping, rather than as principal, it is likely that property will pass on shipment (President of India v Metcalfe Shipping Co [1970] 1 QB 289). If the goods sold are loaded with other goods of a like description so that they remain unascertained, the buyer may acquire an undivided share in the bulk (s.20A; see 4.5.8).

The modern position, however, is that the seller will, typically, retain the property in the goods as security for payment. They will have themselves named in the bill of lading so the goods will be delivered to them or their order. Under s.19(2) where this occurs, ‘the seller is prima facie to be taken to reserve the right of disposal’, which makes the appropriation of goods conditional so that property does not pass until the condition is met (s.19(1)) – the condition being payment by the buyer (see Mitsui & Co Ltd v Flota Mercante Grancolumbiana SA [1989] 1 All ER 951). This can present difficulties because the buyer who has no property interest, will not be able to sue a third party, such as the carrier, in tort for any damage caused to the goods (Leigh & Sullivan Ltd v Aliakmon Shipping Co Ltd (The Aliakmon) [1986] AC 785). Note that the parties may displace the prima facie rule.

7.2.5 Remedies available to the buyer Re-read 6.2 above.

The buyer can reject the documents where they do not comply with those the seller promised to tender (see discussion of the cif contract, below), and the buyer can reject goods that do not conform to a condition of the contract, or if the agreed quantity has not been delivered. The rights to reject the goods and the documents are separate remedies, so the buyer may be able to reject the goods and/or the documents where either or both fail(s) to conform. The buyer loses the right to reject where the breach has been waived or there has been acceptance, but the buyer may still have an action for damages.


7.2.6 Remedies available to the seller Re-read 6.3 above.

Where the buyer is obliged to nominate a ship and fails to do so, which means the seller is unable to deliver the goods, the seller’s remedy lies in an action for damages for non-acceptance of the goods. The seller cannot bring an action for the price because there has been no delivery.

Activity 7.2a. Glass sold fob Liverpool to a buyer in France is packed by wrapping in some

sheets of paper. As a result, the glass is damaged during transit. Advise the buyer.

b. The seller under a contract ‘fob Liverpool, April shipment’ brings the goods alongside the ship shortly before midnight on 30 April. The seller cannot put them on board because the stevedores hired for this task are ‘too busy’. The stevedores will be able to load the goods on 1 May. Advise the buyer.

c. How might your answer to (b) have differed if half of the goods were loaded in March and the rest in April?

d. Under an fob contract, does the fact that property in goods has not passed to the buyer mean that risk will not have passed?

e. Cheese sold ‘fob Liverpool October’ is delivered by the seller to Liverpool port on 14 October. The buyer is required by the contract to nominate a ship, but fails to do this until 28 October by which time the cheese has perished. Advise the seller.

SummaryIn a classic fob contract, the seller puts goods on board a ship nominated by the buyer. The seller pays the cost of delivering the goods over the ship’s rail and takes a bill of lading. The buyer pays the costs of carriage. Normally, risk passes when the goods cross the ship’s rail, but property does not pass because the seller usually reserves the right of disposal until payment.

7.3 cif contracts


7.3.1 DefinitionThis is the most significant type of contract used in international trade. The letters ‘cif’ denote that the goods are sold at a price that includes the price of the goods, and the cost of insurance and freight. The contract will specify the port of arrival (contrast with fob contracts where the port of loading is specified).

The buyer under a cif contract knows the precise cost of the goods because it is not subject to fluctuations in the cost of carriage or insurance. Contrast this with fob contracts in which the buyer pays the cost of carriage and insurance. Variations of the cif contract do, however, allow the seller to pass on some price increases. For example, the ‘c & f’ (cost and freight) contract leaves insurance costs to be paid for separately by the buyer.

In an ordinary sale contract the seller’s duty is to deliver the goods; in a cif contract their principal obligations are:

to ship the goods, or to appropriate to the contract goods that have already been shipped by the seller, or to acquire goods that have already been shipped by someone else


to tender certain documents. These documents symbolise the goods during transit and they enable the holder to resell or pledge the goods. When the goods arrive at their destination the person holding the documents tenders them in exchange for the goods.

The next sections discuss the duties in a ‘classic’ cif contract, but these may be varied by the parties. For example, it is common to require the seller to forward a certificate as to the quality of the goods, or to require the buyer to arrange insurance (a ‘c & f’ contract), or to substitute a delivery order for a bill of lading where goods are shipped in bulk.

7.3.2 Duties of the seller: the goods

Study pack reading Extract from Johnson v Taylor Bros & Co Ltd.

On the definition of the seller’s duties see Johnson v Taylor Bros & Co Ltd [1920] AC 145, Lord Atkinson. See also Smyth & Co Ltd v Bailey Son & Co Ltd [1940] 3 All ER 60 at 67-68; Scottish & Newcastle International Ltd v Othon Ghalanos Ltd [2006] EWCA Civ 1750. Note that the court’s decision was affirmed ([2008] UKHL 11), but the House of Lords classified the contract as fob. However, the Court of Appeal’s discussion of cif contracts remains interesting and the dispute between the courts illustrates the difficulties over classification.

The seller’s main duties are as follows.

Shipment must be at the time, place and in the manner stipulated in the contract. There is no requirement that the seller must have shipped the goods: the cif contract can be fulfilled by acquiring goods already in transit.

The goods must be shipped to the port stipulated in the contract.

The seller must be party to a contract for carriage of the goods to the agreed destination.

The goods must be shipped by the route agreed or, failing such agreement, the usual route.

The goods must be carried by the vessel specified in the contract, or, in the absence of such agreement, a vessel usually employed to carry such goods (T W Ranson Ltd v Manufacture d’Engrais et de Produits Industriels, Antwerp [1922] 13 Ll L R 205).

The goods must conform to the terms of the contract and the obligations in SGA (for example, ss.12-15) at the time of shipment. Goods will not be of satisfactory quality if they were not fit to survive an ordinary voyage on shipment.

The goods must be appropriated to the contract and shipped before the documents are tendered to the buyer (Hindley & Co v East Indian Produce [1973] 2 Lloyd’s Rep 515).

The seller must transfer property in the goods to the buyer at the time stipulated in the contract.

Terms regarding the time and place of shipment are, typically, conditions, so that the buyer can reject the goods if there is breach.

7.3.3 Duties of the seller: documents The seller has obligations regarding documents.

The seller must tender certain documents to the buyer (see below). The description of the goods and their quantity as stated in the documents must comply exactly with the contract. Where incorrect documents are tendered, the buyer is not obliged to accept them and the seller is in breach even though, in fact, conforming goods arrive.


The time specified for tender of the documents is a condition of the contract. If no time is specified, the seller must ‘make every reasonable exertion to send forward the bill of lading as soon as possible after he has destined the cargo to the particular vendee or consignee’ (Sanders Brothers v Maclean & Co [1883] 11 QBD 327, Brett MR).

The presumption is that the documents are to be tendered at the buyer’s place of business (Johnson v Taylor Bros & Co Ltd [1920] AC 145).

The principal documents are the invoice, the bill of lading and the policy of insurance.

InvoiceThis is for the price of the goods, including cost of freight and insurance.

Bill of lading On tendering the bill of lading, the seller transfers rights against the carrier under the contract of carriage to the buyer (Carriage of Goods by Sea Act 1992, s.2(1)). The seller is obliged to make a contract of carriage that is reasonable in the circumstances (s.32(2)). The bill of lading must:

be valid (Arnhold Karberg & Co v Blythe Greene Jourdain & Co [1916] 1 KB 495), genuine and clean, that is, state that the goods were shipped in good order and condition (Cao v British Traders and Shippers Ltd [1954] 2 QB 459)

be a shipped bill of lading: that is, state that the goods were shipped (not merely delivered to the carrier for shipment) at the place and date agreed. The date on the bill is the means by which the buyer can be assured that the goods were shipped during the contractual shipment period, so that tendering an incorrectly dated bill is a breach entitling the buyer to reject. Note that the month of shipment is part of the contractual description of the goods, which means that shipment in a different month is a breach of the implied condition in s.13 (e.g. if the promise is to ship goods in October, shipment in November is a breach of s.13). In such cases there will be a separate breach if the seller delivers an incorrect bill of lading (the promise was to deliver a bill with an October date) (Kwei Tek Chao v British Traders and Shippers Ltd [1954] 2 QB 459 (Sealy and Hooley, pp.346-47, 504))

be issued ‘on shipment’. This does not mean on loading, but it must be reasonably soon afterwards otherwise the ability of the buyer to deal in the goods while in transit is obstructed: a bill issued thirteen days after loading and in another country was not issued ‘on shipment’ (Elof Hansson Ltd v Hamel & Horley Ltd [1922] 2 AC 36)

be transferable

only relate to the contract goods so the buyer can resell or pledge them, which would not be possible if the bill included goods in addition to those contracted

provide for the entire carriage to the specified destination by a specified or customary route (Shipton, Anderson & Co v John Weston & Co [1922] 10 Ll L Rep 762).

The contract may permit a document, such as a delivery order, to be submitted in place of a bill of lading (Comptoir d’Achat et de Vente du Boerenbond Belge SA v Luis de Ridder Limitada (The Julia) [1949] AC 293 (Sealy and Hooley, pp.507-09)).

InsuranceThe seller must obtain insurance that matches the contract of carriage (Belgian Grain & Product Co v Cox & Co (France) Ltd (1919) 1 Lloyd’s Rep 256). This obligation is not breached merely because the insurance does not cover the particular cause of the loss of the goods, as long as the policy is of a type that is usual in the particular trade (C Groom Ltd v Barber [1915] 1 KB 316). It is only an implied obligation and so may be displaced by an express term of the contract stipulating a different level of cover (Geofizika DD v MMB International [2010] EWCA Civ 459 at [46]). The seller must assign the policy to the buyer, so it must only cover the contract goods and must be effective (that is, not void or voidable at the instance of the insurer).


Additional documentsInternational sales contracts commonly require the seller to tender certificates of origin or of quality or fitness (Berger & Co Inc v Gill & Duffus SA [1984] AC 382 (Sealy and Hooley, pp.504-06)).

Study pack reading Berger & Co Inc v Gill & Duffus SA [1984] AC pp.382-397.

Activity 7.3a. Acme buys a quantity of paper from Ecma, a Swedish paper manufacturer, cif

Liverpool. The contract does not stipulate the type of vessel to be used. Ecma is unable to find a cargo ship, but knows that Acme needs the paper urgently and so sends it on a canal barge, which is not designed for sea journeys. As a result, the paper is damaged by sea water. Advise Acme.

b. Jute is bought by Acme from Ecma, cif Liverpool. Ecma, who had bought the jute from Mace, tenders to Acme a bill of lading which records that the jute is carried on a ship called Challenger. When this ship arrives no jute is on board; indeed, no jute was ever loaded. Advise Acme.

c. Goods, sold by an English seller to an English buyer ‘cif Toytown’ (a port in Ruritania), were shipped on a ship registered in Magatonia. Britain is at war with Magatonia. Advise the buyer on whether they are obliged to accept the bill of lading.

d. Under a contract cif Ruritania, goods are duly shipped. Shortly before the buyer receives the documents civil war breaks out in Ruritania. The ship is hit by missiles and sunk as it is entering port. The insurance policy does not cover loss by war. Advise the buyer.

7.3.4 Duties of the buyerThe buyer must:

accept documents that are in conformity with the contract and must pay against such documents. The buyer cannot insist on waiting for the goods to be delivered before paying or refuse to pay merely because the goods are defective (Berger & Co Inc v Gill & Duffus SA [1984] AC 382 (Sealy and Hooley, pp.504-06))

take delivery of conforming goods at the agreed destination

pay unloading costs and any duties at the port of arrival, and obtain any import licence that is required (subject to contrary agreement).

7.3.5 Passing property and risk Re-read the discussion of the rules on passing of property in sale contracts in

Chapter 4 above.

Normally, the parties intend property to pass when the documents are delivered to the buyer and the buyer has paid the price. Therefore s.32(1) (delivery to the carrier is prima facie delivery to the buyer) does not apply to cif contracts. Typically, the seller who has not been paid will retain the documents, but even if this is not the case the seller may reserve the right of disposal of the goods and thereby indicate the intention to retain property in them (s.19). Where goods are shipped and the bill of lading states that they are deliverable to the seller or their order, the presumption is that the seller has reserved the right of disposal (s.19(2)). In such circumstances, the fact that the buyer has gained possession of both the documents and the goods does not mean property has passed. Even if property has passed the buyer may reject goods that do not conform to the contract where the defect is not apparent on the face of the documents (see 7.3.6 below) and, if this occurs, property will revest in the seller (Kwei Tek Chao v British Traders and Shippers Ltd [1954] 2 QB 459 (Sealy and Hooley, pp.346-47, 504); see sections 6.2 above and 7.3.6 below).


What are the rights of the parties where the goods are lost? The normal rule that risk passes with property (s.20) does not apply to most cif contracts. The courts will, usually, imply an intention that risk passes on shipment (Johnson v Taylor Bros [1920] AC 144). If the goods are lost after shipment and after the contract, but before tender and acceptance of the documents, the seller may still tender the documents and the buyer will be obliged to accept them, assuming that they conform to the contract, even though both parties are aware of the loss (Manbre Saccharine Co Ltd v Corn Products Co Ltd [1919] 1 KB 198 (Sealy and Hooley, pp.501-02)). The goods must, however, have been appropriated to the contract. If the goods are lost after the buyer has accepted the documents, the buyer bears the loss.

Where the buyer bears the loss, their remedy (if any) is against the carrier under the contract of carriage, or the insurer under the insurance policy.

Activity 7.5Acme contracts to buy from Ecma 1,000 tons of wheat, which is on board MV Challenger. The ship sinks before delivery or payment. Who bears the loss?

7.3.6 Remedies of the buyer and seller Read 6.2 and 6.3 again.

Study pack reading Treitel, G.H. ‘Rights of rejection under c.i.f. sales’ [1984] Lloyds Maritime and

Commercial Law Quarterly pp.565-577.

The seller’s duty to deliver both the documents and goods results in what Kerr J called ‘a duality of obligations relating respectively to the goods which are the subject-matter of the contract and the documents covering the goods which have to be tendered to the buyer’. The seller may be in breach of the duties relating to one or both of these obligations (Hindley & Co Ltd v East Indian Produce Co Ltd [1973] 2 Lloyd’s Rep 515). This means the buyer has separate rights to reject the documents or the goods: they can reject nonconforming documents and, even if they accept the documents, they may be able to reject nonconforming goods (Kwei Tek Chao (T/A Zung Fu Co) v British Traders and Shippers Ltd [1954] 2 QB 459 (Sealy and Hooley, pp.346-47, 504)).

Since documents must comply exactly with those specified in the contract, the buyer may reject documents which do not conform to the terms of the contract (e.g. when the contract stipulates shipment on a particular date and the bill states that shipment occurred on a different date) or which are inaccurate (e.g. the bill states that goods were loaded at the time stipulated but, in reality, they were not loaded on that date). If the documents do not conform but the buyer only becomes aware of this after they have been accepted, the remedy will lie in damages (but see the discussion of Berger & Co Inc v Gill & Duffus SA below). These are assessed on the basis of what is required to put the buyer in the same position as if the statements had been true. This means that the buyer will not have any damages if there would have been no right to reject the goods because there is no loss: for example, where the bill of lading was incorrectly dated but the goods had been shipped within the contract period (Proctor & Gamble Philippine Manufacturing Corpn v Kurt A Becher [1988] 2 Lloyd’s Rep 21).

If the buyer wrongfully rejects the documents, the seller can treat this as repudiation of the contract. Where the seller does so and the buyer later discovers that the goods do not conform, the buyer cannot use this as a justification for the earlier wrongful rejection of the documents. This is because the duty to ship conforming goods and the duty to present conforming documents are treated as independent obligations (Berger & Co Inc v Gill & Duffus SA [1984] AC 382 (Sealy and Hooley, pp.504-06). See also Treitel [1984] LMCLQ 565). The problem with this is that it requires the buyer to pay against conforming documents and then reject the goods when they are delivered and recover the price. This is not merely a pointless exercise, it means the buyer has neither the goods nor the money and depends on the ability of the seller to pay – what if the seller is insolvent? Another objection to the view of Lord Diplock in Berger is that he said that it was sufficient if the seller presented apparently conforming documents, whereas the obligation is to present documents that do conform.


If the buyer rejects nonconforming documents, the right to reject the goods does not arise because the goods cannot be delivered to the buyer without the documents.

The buyer will lose the right to reject nonconforming goods if the defect was apparent from the documents and the buyer has accepted those documents.

The ability of the seller to cure defects by presenting documents or goods that conform depends on the terms of the contract, but such cure cannot be effected after the time for performance has passed (Borrowman, Phillips, & Co v Free & Hollis [1878] 4 QBD 500. But see Kwei Tek Chao v British Traders and Shippers Ltd [1954] 2 QB 459 (Sealy and Hooley, pp.346-47, 504) and P. Todd ‘Delivery against forged bill of lading’ [1999] LMCLQ 456). The seller cannot repair the defect in the documents simply by offering a guarantee to the buyer (Soules CAF v PT Transap of Indonesia [1999] 1 Lloyd’s Rep 917).

Activity 7.6a. The seller contracts to sell goods cif Liverpool. The buyer, having found a

cheaper supplier, rejects the documents and later defends an action by the seller by showing that the goods when delivered were not of satisfactory quality. Advise the seller.

b. What can the seller under a cif contract do if they tender defective documents and the buyer rejects them?

SummaryIn a typical cif contract, the goods that the seller sells to the buyer have either been shipped by the seller or acquired while in transit. The seller transfers to the buyer the contract for the carriage of the goods and the policy of insurance covering the goods during transit. Normally, risk will pass on shipment of the goods, but property will only pass on delivery of the documents and payment by the buyer. The buyer is under separate obligations to accept conforming documents and to accept conforming goods.

7.4 Ex-works, ex-ship and fas contracts


In an ex-works contract, the buyer’s duty is to take delivery at the works (typically, the works or warehouse of the seller) and property and risk pass at that time.

In an ex-ship contract the buyer is only obliged to pay the price when the goods are delivered to the buyer at the port of delivery rather than when the seller tenders the documents. Normally, the seller pays all the costs, except unloading charges and import duties, and property and risk pass to the buyer when the goods are delivered. The main distinction between cif and ex-ship (or arrival) contracts is that actual delivery of the goods is required in the latter, so that the buyer is not concerned with the shipment and, if delivery is not made, can recover any money paid because the consideration has totally failed (Comptoir d’Achat et de Vente du Boerenbond Belge SA v Luis de Ridder Limitada (The Julia) [1949] AC 293 (Sealy and Hooley, pp.507-09)). The nature of ex-ship contracts means that property and risk will, usually, only pass on delivery.

An fas (‘free alongside’) contract is similar to an fob contract, except that the seller’s duty is to deliver the goods alongside the ship nominated by the buyer or stipulated in the contract and the buyer is, usually, required to meet the costs of loading from alongside the ship and of documentation.


7.5 Electronic ‘documentation’


In view of the importance of transmitting the shipping documents and the problems caused by delays, the development of methods of sending instantaneously electronic copies of documents might seem attractive. There are powers to apply the provisions of the Carriage of Goods by Sea Act 1992 to electronic shipping documents (s.1(4), (5)). However, attempts to establish electronic bills of lading have largely struggled. The main electronic system is known as Bolero (see www.bolero.net). This has been created with the active participation of many of the major banks involved in international trade; the problem is that it has not been widely accepted by merchants and carriers. Bolero is based around the Core Messaging Platform, which allows the exchange of electronic trade documents through the internet. This is connected to the Title Registry, which records the rights and obligations contained in an electronic bill of lading and enables the transfer of ownership via the internet. The system is quicker and more secure than paper documentation. The principal disadvantage is that it requires registration by those wishing to use it and so cannot be used where one party to a transaction is not a member.

7.6 An international law of international sales?


Study pack reading Goode, R. ‘Rule, practice, and pragmatism in transnational Commercial law’

International and Comparative Law Quarterly pp.539-562.

Ademuni-Odeke ‘The nature of c.i.f. contract: is it a sale of documents or a sale of goods?’ [1992] Journal of Contract Law pp.158-176.

Up to this point it has been assumed that English law and the English courts will be applied to the international sale. The question of which legal system and which forum should apply where the parties are in different countries and the goods are, perhaps, somewhere between the two is a problem for the area of law known as Conflict of Law (or Private International Law), which is outside this course.

Nevertheless, it is easy to recognise that disputes as to which legal system might apply could be avoided if nation states adopted a single system of rules. Such a system would not remove all the difficulties. Most obviously, unless there were a single international sales court, application of the rules would be left to the courts in different countries and they might interpret them differently.

The Uniform Law on International Sales (based on an earlier convention) was an attempt to produce such a set of rules. It was ratified by the UK but not made mandatory: parties could adopt its terms in their contract, but few chose to do so. Another international agreement, the United Nations Convention on Contracts for the International Sale of Goods (the Vienna Convention), originated at a conference in 1980. This convention has been remarkably successful in that most major trading countries have incorporated it into their legal systems, with the notable exception of the UK.

In addition, the International Chamber of Commerce has drawn up standard terms called Incoterms (International Rules for the Interpretation of Trade Terms) that contracting parties can incorporate into their contracts. Particular trades have also developed their own model contracts (for example, GAFTA, Grain and Feed Trade Association, see www.gafta.com/contracts).

You will not be expected to know in detail the provisions of the Vienna Convention or the Incoterms; you are simply expected to be aware of their existence and purpose.



Bradgate, pp.766-94.

For a very full discussion of the organisation of international sales transactions see Goode (2010), Chapter 32. However, you will not be expected to have a detailed knowledge of the matters discussed in that chapter.

Bridge, M. ‘The bifocal world of international sales: Vienna and non-Vienna’ in Cranston, R. (ed.), Making commercial law: essays in honour of Roy Goode. (Oxford: Clarendon Press, 1997) [ISBN 978-0198260814].

Nicholas, B. ‘The Vienna Convention on Contracts for the International Sale of Goods’ (1989) 105 LQR 201.

Sample examination questionDiscuss the proposition that, ‘a cif contract is not a sale of goods, but a sale of documents relating to goods’ (Arnhold Karberg & Co v Blyth, Green, Jourdain & Co [1915] 2 KB 379, 388, Scrutton J).


It is easy to see why such a contract might be characterised as a sale of documents because documents are at its core. You might demonstrate this by a brief outline of the characteristics of a cif contract and how it works. Then you might discuss the obligation of the buyer to accept documents and the circumstances in which the buyer is obliged to pay on tender of the documents, even though the goods have been lost.

Having discussed the role of the documents, you might look at the argument that this is a contract for the sale of goods. You might note that the buyer may reject the goods if they do not conform to the contract and meet the implied terms in the SGA, and the buyer is not necessarily obliged to take non-conforming goods even though the documents have been accepted. If the contract were performed simply by delivery of the documents, the buyer would have no right to reject the goods.

You might conclude that the transaction consists of two sets of obligations, one relating to the documents and the other to the goods. Lord Diplock (Berger & Co Inc v Gill & Duffus SA [1984] AC 382; see Treitel [1984] LMCLQ 565 in your study pack) remarked that these were independent obligations on the seller. However, this view is controversial since, among other things, it requires the buyer to pay against conforming documents and then reject the non-conforming goods when they are delivered and recover the price (see the criticisms made by Goode (2010), p.1042).

Read the Court of Appeal decision in Arnhold Karberg & Co v Blyth, Green, Jourdain & Co [1916] 1 KB 495. Warrington and Bankes LJJ rejected Scrutton J’s view and said that it is a sale of goods to be performed by delivery of documents. In Manbre Saccharine Co Ltd v Corn Products Co Ltd [1919] 1 KB 198, McCardie J said that delivery under a cif contract was by goods, not by documents. Scrutton LJ in James Finlay & Co Ltd v N.V. Kwik Hoo Tong Handel Maatschappij [1929] 1 KB 400, unsurprisingly, preferred his own view. See Ademuni-Odeke ‘The nature of c.i.f. contract: is it a sale of documents or a sale of goods?’ [1992] Journal of Contract Law 158; Goode (2010), p.1042.


Reflect and review







Ready to move on


Need to study again

I can identify the key characteristics of cif and fob contracts.

I can analyse the distinctions between cif and fob contracts.

I can discuss the duties of the seller and buyer under cif and fob contracts.

I can explain the remedies available to the seller and buyer under cif and fob contracts.

I can understand the general issues involved in the use of electronic documentation and the effect of international agreements on the terms of international sale contracts.


Must revise

Revision done

7.1 Documents and contracts

7.2 fob contract

7.3 cif contracts

7.4 Ex-works, ex-ship and fas contracts

7.5 Electronic ‘documentation’

7.6 An international law of international sales?


Notes

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

8.1 Documentary bill (bill of exchange) . . . . . . . . . . . . . . . . . . . 143

8.2 Documentary credit . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

8.3 Strict compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

8.4 Autonomy of the credit . . . . . . . . . . . . . . . . . . . . . . . . . 152

8.5 Contractual rights and obligations . . . . . . . . . . . . . . . . . . . . 155


8 Payment: documentary credits


Introduction

This chapter looks at some methods of payment used in international sales where the buyer is in one country and the seller is in another. Where goods are not sold on credit and the buyer and seller are not known to one another, the seller may be concerned to ensure payment is received before goods are delivered because, even though the seller can reserve title, this may not give effective protection. At the same time, the buyer may want to be sure of receiving the goods before paying the seller. These problems are likely to be more acute where the transaction involves parties in different countries. To meet these difficulties merchants and lawyers have devised various solutions; one of these is the documentary credit or letter of credit.

This chapter begins with a brief discussion of documentary bills, which is included to provide some insight into the problems that documentary credits are intended to solve. The main focus is the documentary credit. You will not be required to know about the law relating to other forms of payment, such as other types of letters of credit, bills of exchange (beyond a general understanding of what they are), cheques, credit or debit cards, or electronic fund transfers.

For the issues raised in this chapter of the subject guide, in addition to Sealy and Hooley you can also consult Bradgate, pp.795-816.


define and identify the characteristic features of a documentary credit

explain the significance of the Uniform Customs and Practice for Documentary Credits (UCP)

identify the different types of documentary credit

explain the steps involved in the opening of a credit

analyse the various contractual relationships

discuss the strict compliance and autonomy of the credit rules

explain the rights and obligations of the parties.

Commercial law Chapter 8 Payment: documentary credits page 143

8.1 Documentary bill (bill of exchange)


In the sale contract the parties may agree that payment will be by a bill of exchange. A bill of exchange is:

an unconditional order in writing, addressed by one person to another signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer (s.3(1), Bills of Exchange Act 1882).

The seller draws (i.e. writes) the bill, naming the seller as the person to whom payment is to be made (the payee). The bill is transmitted to the buyer along with a document of title to the goods, such as a bill of lading. Depending on the contract, the buyer is required either to pay or accept the bill of exchange: this depends on whether it is a ‘sight’ bill, which is payable immediately, or a ‘term’ bill, which is payable at a specified future date.

A bill of exchange is a negotiable instrument. This means that:

a bill can be transferred by delivery or by indorsement and delivery

transfer is effected without assignment, there is no requirement of notice of transfer to those liable on the bill, and the transferee can sue in their own name

a transferee, who has given value and has no notice of any defect in the transferor’s title to the bill (such a transferee is known as a holder in due course), acquires the full rights of a true owner, even if the transferor had no such rights.

There are some problems with this method of payment. If the buyer does not honour the bill, the document of title (the bill of lading) must be returned and property will not pass (s.19(3), Sale of Goods Act 1979). However, the unscrupulous buyer might retain possession and wrongfully resell the goods to a third party. This is conversion by the buyer, but the third party may acquire good title under the exceptions to the nemo dat quod non habet rule. The seller may seek some protection against this eventuality by instructing their own bank (the remitting bank) to send the bill and the documents to a bank (the collecting bank) in the buyer’s country. The collecting bank is instructed not to deliver the documents to the buyer until the bill has been accepted or paid. The International Chamber of Commerce has issued Uniform Rules for Collections (URC 522 (1995)), which, if incorporated by the parties into the sale contract, govern the relationship between the seller and the remitting bank and between the remitting and collecting banks. The seller has no contractual relationship with the collecting bank, unless it can be shown that the seller:

i. authorised delegation to the collecting bank (there would be a breach of duty if the remitting bank delegated without authorisation), and

ii. authorised the remitting bank to establish privity of contract between the seller and the collecting bank.

The remitting bank will be liable for the actions of the collecting bank, unless there is an exclusion clause in the contract between the seller and the remitting bank (Calico Printers’ Association Ltd v Barclays Bank Ltd and Anglo-Palestine Co Ltd [1930] 38 Ll L Rep 105; [1931] 39 Ll L Rep 51).

In addition, dishonour of the bill by the buyer could occur after the goods have been shipped. While the seller may have an action for breach, he or she is left with the practical inconvenience of having to dispose of goods that are in transit or in another country.


8.2 Documentary credit

8.2.1 Uniform Customs and Practice for Documentary Credits (UCP)


Reed Smith, Commodities Finance: Impact of UCP 600 (2007) http://tinyurl.com/2vfr37v

The documentary credit or banker’s commercial credit or commercial letter of credit provides a means of avoiding some of the difficulties posed by the documentary bill. Originally, it was simply a letter from the buyer’s bank to the seller’s bank guaranteeing payment. It now involves a promise by the buyer’s bank to the seller to pay against documents relating to the goods. This gives the seller greater reassurance, although there is the risk of the bank becoming insolvent and so preventing it from fulfilling its promise. If the credit is transferrable, it can be used by the seller to finance other transactions.

Invariably, documentary credits incorporate the Uniform Customs and Practice for Documentary Credits (hereafter UCP), which was first issued in 1933. The most recent version was produced by the International Chamber of Commerce (ICC) in 2006 (known as UCP 600), which came into effect on 1 July 2007, replacing UCP 500 (issued in 1993). The ICC was established in 1919 to facilitate international trade and the objective of the UCP is to pursue this objective through the codification of best practice in international payments. By this means it is intended that the UCP should establish a degree of uniformity that is not affected by the particular country or legal system within which the rules are being applied.

The UCP have no legal effect unless incorporated into a contract by the parties (UCP 600, article 1), although in the unlikely event of there being no clause incorporating the UCP, it seems likely that a court would imply them or, at least, construe the contract in accordance with the UCP – assuming this did not contradict the intention of the parties. If the UCP are incorporated particular provisions can be excluded, either wholly or partially, by express terms of the contract and by legislation. But contractual exclusions are likely to be viewed with caution by the courts. In Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 WLR 631, the credit was expressed to be subject to the UCP ‘except so far as otherwise expressly stated’; but it was held that the UCP would only be overridden where there was an irreconcilable inconsistency between the express terms and the UCP. ‘To my mind, it is wrong to approach this question of construction by looking at the document first without reference to the Uniform Customs’ (Sir John Megaw). Yet, if the parties have clearly agreed on something that is contrary to the UCP, their agreement must be applied.

The UCP are not comprehensive and various matters are omitted, which means recourse must be had to the common law to fill the gaps.

In view of the usage of letters of credit it might seem remarkable that relatively few cases come before the courts. Sir Thomas Bingham MR (Glencore International AG v Bank of China [1996] 1 Lloyd’s Rep 135 (Sealy and Hooley, p.833)) explained:

The parties to these transactions (buyers, sellers, issuing and advising banks) are seasoned professionals, not inexperienced consumers. The banks are not required to familiarise themselves with any of the infinitely various terms, conventions or esoteric understandings of the sales transactions themselves: their role is limited to the demanding, but essentially clerical task of scrutinising the documents tendered under the credit to establish that they conform to the terms of the credit. Banks, rightly jealous of their reputation in the international market-place, are generally careful not to refuse payment on grounds of non-conformity unless the non-conformity is clear. Practice is generally governed by the Uniform Customs and Practice for Documentary Credits (“the UCP”), a code of rules settled by experienced market professionals and kept under review to ensure that the law reflects the best practice and reasonable expectations of experienced market practitioners. When Courts, here and abroad, are asked to rule on questions…they seek to give effect to the international consequences underlying the UCP.


Useful further reading Goode (2010), pp.1053-120.

Ulph, J. ‘The UCP600: documentary credits in the 21st century’ [2007] Journal of Business Law 355.

Isaacs, M. and M. Barnett ‘International trade finance: letters of credit, UCP600 and examination of documents’ [2007] Journal of International Banking Law and Regulation 660.

8.2.2 Opening a credit


The parties to a credit are:

applicant: the party on whose behalf the credit is issued (e.g. the buyer of the goods)

beneficiary: the party to whom payment under the credit is to be made (e.g. the seller of the goods)

issuing bank: the bank who issues the credit on the instruction of the applicant

advising or correspondent bank: the bank (usually a foreign correspondent of the issuing bank) that advises the beneficiary

confirming bank: the bank (usually, the advising bank) that enters into a separate promise (separate from the promise made by the issuing bank) to the beneficiary that payment will be made.

nominated bank: the bank that pays – this may or may not be the same as the advising/confirming bank.

The parties in the underlying sale contract must agree that payment is to be made by documentary credit, so the obligation to open the credit arises from that contract and the credit must conform to the requirements set out in the contract. Nevertheless, it is important to emphasise that the documentary credit gives rise to separate contractual rights and obligations from those in the sale contract (see 8.2.3 below). Article 4 of the UCP 600 (article 4) states, ‘A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract’ (see also UCP 600, articles 2, 5 and 14(a)).

A documentary credit is an arrangement whereby the issuing bank, at the request of the applicant (who in a sale will be the buyer), and on presentation of documents stipulated in the credit:

will make a payment to (or to the order of) the beneficiary (the seller), or

will accept and pay bills of exchange (drafts) drawn by the beneficiary, or

authorises another bank to do these things.

Normally, the sequence of events is as follows. The contract of sale stipulates payment by documentary credit. The obligation of the buyer to open a credit will normally constitute a condition precedent to the obligation of the seller to deliver, unless the parties agree to the contrary in the sale contract (Garcia v Page & Co Ltd [1936] 55 Ll L Rep 391 (Sealy and Hooley, pp.886-87)). The buyer (the applicant) applies to a bank in their country (the issuing bank) to open an irrevocable credit (see 8.2.4 below) in favour of the seller (the beneficiary). The issuing bank opens the credit and undertakes to pay, if documents specified in the credit, which relate to the goods, are presented (e.g. the bill of lading, insurance policy, invoice). The credit may be sent to the seller, but, more usually, the issuing bank instructs a bank (the advising or correspondent bank) in the beneficiary’s country to inform the beneficiary that a credit has been opened. The issuing bank will be bound to the seller as soon as the advising bank advises the seller that the credit has been opened. This is in spite of a


lack of privity or consideration between the beneficiary and the issuing bank (see the diagram in Sealy and Hooley, p.851). It seems right to treat the documentary credit as an exception to the normal rules on consideration and privity of contract by reason of mercantile usage.

The advising bank has no contractual liability to the seller. However, the seller or the issuing bank may authorise it to confirm the credit, in which case it becomes the confirming bank and the credit is a confirmed credit (as opposed to an unconfirmed credit where the advising bank has not added its confirmation). This provides the seller with another – and local – course of action against the confirming bank, in addition to the action against the issuing bank.

The seller, who ships the goods, tenders the documents to the nominated bank either directly or, more often, through their own bank. The nominated bank is authorised to honour the credit (and may also be the advising bank). This does not put the nominated bank under an obligation to the beneficiary of the credit to pay, unless it is the confirming bank, or it has agreed to pay and this has been communicated to the beneficiary (UCP 600, article 12(a)). UCP 600, articles 15 and 16 deals with the processing of the presented documents by the banks (see also article 35, which excludes liability regarding the transmission of documents). Presentation of the documents to the nominated bank is more convenient than requiring presentation to the issuing bank, if it is in a different country. Where the seller is not known by the nominated bank, presentation of the documents will normally be made by the seller’s bank as agent of the seller. If the documents conform to those stipulated in the credit, the nominated bank or confirming bank will pay (or the arrangement may be for a deferred payment undertaking, which will be paid at maturity, or the acceptance by the bank of a bill of exchange: see 8.2.3).

The nominated bank passes the documents to, and seeks reimbursement from, the issuing bank. The documents, which are now in the hands of the issuing bank, will be released to the buyer either on payment or under a trust receipt, which allows the buyer to take possession of the goods subject to the bank’s interest.

The credit must be opened at the time stipulated in the sale contract. In the absence of such a term, the credit must be opened a reasonable time before:

the date of shipment of the goods is required to take place where a single date is specified in the contract

the beginning of the period within which shipment is to occur: for example, where the contract requires shipment between 1 January and 28 February, the credit must be opened before 1 January.

These rules are based on the objective of the credit, which is to reassure the seller of payment before shipment takes place. (Sinason-Teicher Inter-American Grain Corpn v Oilcakes and Oilseeds Trading Co Ltd [1954] 1 WLR 1394). The credit must stipulate an expiry date and presentation of the documents for payment must be made by the seller before that date (UCP 600, articles 6(d), (e) and 29). Payment by credit is conditional payment, unless otherwise agreed, so that if the credit is not honoured, the debt revives.

The separation between the sale contract and the letter of credit means that where documents have been accepted and payment made, the buyer may still reject defective goods if they do not conform.

Although beyond the scope of this course, it is worth noting that problems frequently arise in relation to disputes over letters of credit concerning which country’s laws apply and in which country’s courts claims should be tried (for example, Trafigura Beheer BV v Kookmin Bank Co [2006] EWHC 1921; PT Pan Indonesia Bank Ltd TBK v Marconi Communications International Ltd [2005] EWCA Civ 422).

Activity 8.1List the contractual relationships involved in a confirmed credit and, in broad terms, the obligations of the parties.


SummaryThe documentary credit or banker’s commercial credit or commercial letter of credit provides a means of avoiding some of the difficulties posed by the documentary bill or bill of exchange. The safeguards afforded by a documentary credit arise from contractual promises by the issuing bank (and the confirming bank, in the case of a confirmed credit) that the money due will be paid against presentation of certain documents.

8.2.3 Types of credit


The UCP 600, article 2 defines a credit as ‘any arrangement… that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation’. In other words, it is an undertaking by the issuing bank that payment will be made provided the stipulated documents are presented and the terms of the credit met (UCP 600, article 7).

A documentary credit must specify whether it is available by sight payment, acceptance, deferred payment, or negotiation (UCP 600, articles 2, 6(b)). If the credit does not stipulate that it is available only with the issuing bank, it must nominate a bank (the nominated bank) that is authorised to pay, to incur a deferred payment obligation, to accept, or to negotiate (UCP 600, article 6(a)).

Irrevocable credit As has been seen, the definition of a documentary credit in UCP 600, article 2, refers only to ‘irrevocable’ credits and the assumption is that all credits are irrevocable, unless the parties stipulate the contrary in the credit (UCP 600, article 3). This is a shift from UCP 500 which also included revocable credits, that is, credits that the issuing bank can vary or cancel without notifying the beneficiary. The obvious disadvantages of such credits meant they had become uncommon in practice. An irrevocable credit embodies a promise by the issuing bank to honour (pay) the credit upon the presentation of the documents specified in the credit (UCP 600, articles 2 and 7(a)). A credit is irrevocable even if there is no indication on its face to that effect (UCP 600, article 3). Once the irrevocable credit has been transmitted to the beneficiary, any variation or cancellation requires their consent as well as that of the issuing bank and any confirming bank (UCP 600, article 10(a); but see UCP 600, article 38). Any amendment proposed by the issuing bank will bind it once issued, but will not bind either the confirming bank or the beneficiary, unless each consents (UCP 600, article 10(b), 10(c)).

Straight creditStraight credits involve an undertaking to pay by the issuing bank that is made to the seller alone. These should be contrasted with negotiation credits where the issuing bank’s promise is to the nominated bank (in an open negotiation credit the issuing bank’s promise is to any bank), which has been authorised to advance money for bills of exchange drawn by the seller on another party, such as the issuing bank. The bank that has negotiated (bought) the bills from the seller can present them in accordance with the terms of the credit and receive payment when it falls due (UCP 600, articles 7(c) and 8(c)). In other words, the beneficiary is replaced by the negotiating bank and it is the latter that acquires the right to payment.

Revolving credit The parties may agree that the credit takes the form of a revolving credit. Where, for instance, delivery of goods is to be made under the sale contract by instalments, the parties can agree that during the period specified in the credit payment can be claimed on the delivery of each instalment as long as the correct documents are presented and the upper limit of funds available is not exceeded.


Confirmed and unconfirmed credits A confirmed credit involves a promise by, usually, the advising bank to honour the credit. Where the credit is unconfirmed no such liability arises (UCP 600, articles 2, 8(a), 9(a), 12(a), (c))

Standby creditThis is used where another method of payment has been agreed by the parties and the credit operates as a sort of guarantee – if payment is not made under the agreed method, the seller can claim under the standby credit.

Transferable creditA credit will be transferable where certain conditions are met (UCP 600, article 38: e.g. the transferring bank consents and the credit is designated as transferable). This entitles the seller to require the bank to pay a third party and is particularly useful for those sellers who bought the goods that are the subject of the present sale and wish to pay for them. The seller may transfer all or only part of the amount due under the credit. Since a letter of credit is not a negotiable instrument it cannot be transferred like a bill of exchange by indorsement and delivery. Under a transferable credit the substituted beneficiary acquires the same rights as the original beneficiary and can exercise those rights in their own name.

If the credit is not stated to be transferable, the beneficiary may still be able to assign (in broad terms, this means to transfer rights in) any payment due under the credit (UCP 600, article 39), but this does not transfer the right of performance so that the seller (or, more likely, the assignee, who will be appointed agent of the seller) must present the documents to the bank. But what generally happens is that the seller returns the original letter of credit to the advising bank (the transferring bank) and a new letter of credit is issued to the ‘transferee’, so that there is a novation (a novation is where an existing contract is replaced by a new contract). The new beneficiary under the credit is not a mere assignee, but is entitled to tender their own performance.

The other possibility is that the seller uses the credit as security for the issue of another, separate credit (a back-to-back credit) under which a third party is made the beneficiary.

As has been seen, there are various methods of payment under a credit.

Payment at sight means the seller will usually be required to draw a sight draft (a draft is a bill of exchange) on a bank (the issuing or the advising bank, or another bank), which is presented along with the stipulated documents to that bank for immediate payment.

An agreement for deferred payment means the bank agrees to pay at some determinable time in the future (for example, a certain number of days after shipment of goods) without presentation of the documents. The documents are passed to the buyer. A deferred payment credit can be discounted (that is, paid at a reduction on the face value). This involves the beneficiary assigning its rights under the credit to the discounting bank. The problem is that any defence available against the beneficiary may also be available against the discounting bank, which, therefore, takes a risk. This was highlighted in Banco Santander SA v Bayfern Ltd [2000] 1 All ER (Comm) 776), but UCP 600, articles 7(c) and 8(c) (see also article 12(b)) altered this by creating an undertaking by the issuing and confirming banks to reimburse on maturity, although, ultimately, the bank which pays can recover from the applicant.

Where there is an acceptance credit, the bank agrees to accept a bill of exchange drawn on it by the seller. Normally, this is a time bill – that is, it is payable at a future date. The seller may hold the bill to maturity or discount it to a bank, which, as long as it takes in good faith, acquires the bill free from any defences that might be raised against the seller by the issuing bank.


8.3 Strict compliance


8.3.1 Strict complianceThe documentary credit relies on the presentation of the documents relating to the goods required by the terms of the credit. The bank to which documents are presented must ensure that they comply with the terms of the credit. Sellers need to be reassured that banks across the world will use the same standards when determining if the documents comply with the terms of the credit. There is no obligation to check them against the goods. The UCP 500 and its predecessors did not require strict compliance between the documents and the credit, and the UCP only lays down broad principles. The courts therefore look at standard international banking practice and at the International Standard Banking Practice for the Examination of Documents under Documentary Credits, which was produced by a taskforce appointed by the Banking Commission of the ICC.

The English courts have applied a strict compliance rule. The documents must comply precisely with requirements stipulated in the credit. The issuing or confirming bank is only required to pay, and is only entitled to be reimbursed by the buyer, if the documents presented strictly conform to those stipulated in the credit. Viscount Sumner remarked that, ‘there is no room for documents which are almost the same, or which will do just as well’ (Equitable Trust Co of New York v Dawson Partners Ltd [1927] 27 Ll L Rep 49 (Sealy and Hooley, p.827)). Even apparently insignificant discrepancies will mean the bank must not pay (Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1993] 1 Lloyd’s Rep 236; see also, [1999] 1 Lloyd’s Rep 36 (Sealy and Hooley, p.830)).

To determine whether or not the description of the goods in the document complies with the credit, the court will look at the document as a whole, but will also look to see if there is inconsistency between documents (Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147 (Sealy and Hooley, pp.863-64); Glencore International AG v Bank of China [1996] 1 Lloyd’s Rep 135 (Sealy and Hooley, p.833); Credit Agricole Indosuez v Chailease Finance Corporation [2000] 1 All ER (Comm) 399 (Sealy and Hooley, pp.833-34)).

One reason for this rule is illustrated by JH Rayner & Co Ltd v Hambro’s Bank Ltd [1943] KB 37 (Sealy and Hooley, p.829). The credit stipulated Coromandel groundnuts, but the seller presented a bill of lading for machine-shelled groundnut kernels and an invoice for Coromandel groundnuts. Even though within the trade these terms were interchangeable, the bank was entitled to refuse payment because it could not be expected to have notice of all the trade customs involved in the transactions that underlie the documentary credits with which it might deal. Moreover, banks cannot be expected to be able to distinguish between minor and material discrepancies. Furthermore, the parties have not agreed that the bank should have any discretion over what is required for compliance. In general terms, this approach fits in with the separation between the underlying contract (for example, the sale contract) and the credit, which means that the banks do not have to concern themselves with the performance of the underlying contract. Finally, the banks are agents of the applicant and so must adhere to the terms of their authority: failure to do so will mean the applicant has no obligation to reimburse.

The problem with a strict compliance rule is that it meant a majority of documentary credit presentments were not compliant; indeed the introduction to UCP 600 noted that around 70 per cent of documents were non-compliant on first presentation.

The courts have allowed some tolerance by not requiring mirror image compliance (that is, the use of exactly the same words), but only that the words used in one document should not be inconsistent with those used in another: for example, ‘Coromandel groundnuts’ is consistent with a document describing the goods as ‘Coromandel groundnuts per order 3702’ but not with one describing them as ‘machine-shelled groundnut kernels’.


In addition, the courts permitted banks to pay where there is a trivial discrepancy. What is meant by ‘trivial’ is unclear. In Bankers Trust Co v State Bank of India [1991] 2 Lloyd’s Rep 443, it was held to be trivial where the telex number of the buyer was given as 931310 on the relevant documents instead of 981310 because there was no doubt that this was a mere typographical error (see UCP 600, article 14(j)). In Glencore International AG v Bank of China [1996] 1 Lloyd’s Rep 135, the word ‘branch’ was used instead of ‘brand’, but the court held that this was a mere error and the word should be read as ‘brand’. Yet, in another case, the failure to place the number of the letter of credit and the buyer’s name on each document was held to be fatal (Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1999] 1 Lloyd’s Rep 36), and the misspelling of a name may also be fatal (Beyene v Irving Trust Co., 596 F. Supp. 438 (S.D.N.Y.), affirmed, 762 F.2d 4 (2nd Cir. 1985)).

It might be suggested that the courts could use the trivial discrepancy exception to relax strict compliance or, at least, to alter its meaning. Evans LJ has remarked that ‘the requirement of strict compliance is not equivalent to a test of exact literal compliance in all circumstances and as regards all documents. To some extent, therefore, the banker must exercise his own judgment whether the requirement is satisfied by the documents presented to him.’ (Kredietbank Antwerp v Midland Bank plc [1999] 1 All ER (Comm) 801 (Sealy and Hooley, p.831).)

While reiterating the strict compliance principle, UCP 600 relaxes it to some extent (Fortis Bank SA v Indian Overseas Bank [2009] 2 CLC 550; [2010] EWHC 84 (Comm)). Article 14(a) states that the bank ‘must examine a presentation to determine, on the basis of the documents alone, whether or not the documents on their face constitute a complying presentation.’ If there is a complying presentation the bank must pay (UCP 600, article 15). UCP 600, article 14(b) states:

Upon receipt of the documents the Issuing Bank and/or Confirming Bank, if any, or a Nominated Bank acting on their behalf, must determine on the basis of the documents alone whether or not they appear on their face to be in compliance with the terms and conditions of the Credit. If the documents appear on their face not to be in compliance with the terms and conditions of the Credit, such banks may refuse to take up the documents.

UCP 600 highlights the importance of the commercial invoice and makes a distinction between it and other documents. Article 18(c) states that the description of the goods in the commercial invoice must correspond with the description in the credit. In other documents certain data must be present so that they can be connected with the cargo (Banque de L’Indochine et De Suez SA v JH Rayner (Mincing Lane) Ltd [1983] Q.B. 711). The description they contain may not be identical as long as this does not conflict with the description in the credit (UCP 600, article 14(d), (e). See Glencore International AG v Bank of China [1996] 1 Lloyd’s Rep 135 (Sealy and Hooley, p.863), where the court took a contextual approach, stating that the documents should be read together and not separately. Compare with Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1993] 1 Lloyd’s Rep 236 (Sealy and Hooley, pp.859-60)). UCP 600, article 14(j) states that addresses of the beneficiary and applicant in documents need not be the same as stated in the credit, but must be within the same country, and contact details (telephone, email, telex, etc) will be disregarded. Article 17 permits copies to be used in certain circumstances where ‘original’ documents were stipulated (see 8.3.3 below). Article 30(a) states that ‘about’ or ‘approximately’ used in connection with the amount of the credit or the unit price stated in the credit are to be construed as allowing a tolerance not exceeding 10 per cent. Article 30(b) allows a tolerance of 5% in the quantity of goods, unless the credit stipulates the quantity in terms of numbers of packages or individual items. It would seem, therefore, that the latter would lead to a different decision in Moralice (London) Ltd v F Man [1954] 2 Lloyd’s Rep 526 (Sealy and Hooley, p.858). (UCP 500 article 39(c) permitted a similar tolerance).

These developments should not be pressed too far and be seen as an abrogation of the strict compliance test. Certainly they would not have changed the decision in the JH Rayner case. Yet, while they may ease the job of banks, they may also put them at risk of rejecting documents that comply, or paying where the documents do not comply.

(Note the application of the strict conformity rule as between the buyer and seller: Seely and Hooley, p.828).


Activity 8.2a. Why is there no obligation on the bank to check the documents against the

goods?

b. Advise the bank on its obligation to pay where the letter of credit requires the presentation of documents describing goods as ‘new’, whereas how they actually describe the goods is variously as ‘in new condition’, ‘new, good’ and ‘new-good’.

c. Advise the bank where the documents are required by the credit to include ‘a certificate of quality issued by experts’. On presentation, there is one certificate of quality signed by an expert.

d. Advise the bank where goods are described in the commercial invoice as, ‘Origin: Any Western brand – Indonesia (Inalum Brand)’, but the credit requires the invoice to state that the goods are, ‘Origin: Any Western brand’.

8.3.2 Effects of non-compliance It is a matter for the bank – not the applicant – to determine if the documents conform (Bankers Trust Co v State Bank of India [1991] 2 Lloyd’s Rep 443), but having identified a discrepancy the bank may approach the buyer for a waiver (UCP 600, article 16(b)). This does not extend the time period within which the bank must make a decision (see 8.3.3). The buyer, of course, may choose not to waive non-compliance and the motive for doing so is irrelevant.

The bank’s safest position might be to reject non-compliant documents, but, in practice, it may choose to take a risk rather than annoy a valued customer. It is also worth reflecting on the impact that strict adherence by banks to their obligations might have on the system of payment by documentary credit in view of the estimate that as many as 70 per cent of all tenders are defective.

If the bank refuses documents for non-compliance, it must give notice to the bank from which the documents came, or to the beneficiary of the documents where presented by the beneficiary directly. This notice must list all of the discrepancies (UCP 600, article 16) and must be issued within 5 banking days following the day of presentation (UCP 600, article 14(b); Bankers Trust Co v State Bank of India [1991] 2 Lloyd’s Rep 443 (Sealy and Hooley, pp.872-74)). While the bank may contact the applicant to see if they are prepared to waive the discrepancy, this does not extend the deadline (UCP 600, article 16(b)). Failure to list a discrepancy or to meet the deadline will mean that the notice relating to discrepancies is not properly served under article 16, which means that the bank cannot argue that the documents do not comply (UCP 600, article 16(f)). The bank cannot later raise discrepancies not listed in the original rejection (UCP 600, article 16(c)(ii)). The beneficiary can cure defects and tender documents again as long as the credit has not expired.

Where the documents do not comply with the credit, the bank can pay subject to an indemnity from the beneficiary for any loss (Banque de l’Indochine et de Suez SA v JH Rayner (Mincing Lane) Ltd [1983] QB 711 (Sealy and Hooley, pp.877-78)). This strategy obviously involves risk for the bank and its willingness to do it depends on a number of factors, such as an assessment as to the likelihood of the buyer refusing to adopt the payment and the desire of the bank to maintain good relations with the customer (the beneficiary).

8.3.3 DocumentsThe credit requires the presentation of certain documents and UCP recognises the likelihood that these may not be strictly speaking the original documents but may be photocopies or may be produced by computers. UCP 500 stated that these met the requirement to supply original documents, if marked as original. This led some courts to require all word-processed documents to be so marked, even where they were original documents. Clarity has been provided by UCP 600, article 17:


A bank shall treat as an original any document bearing an apparently original signature, mark, stamp, or label of the issuer of the document, unless the document itself indicates that it is not an original.

Unless a document indicates otherwise, a bank will also accept a document as original if it:

i. appears to be written, typed, perforated or stamped by the document issuer’s hand; or

ii. appears to be on the document issuer’s original stationery; or

iii. states that it is original, unless the statement appears not to apply to the document presented.

This is a change from UCP 500, article 20(b). Nevertheless, it leaves many things uncertain: for example, what about an unmarked original document, and what is meant by ‘it… appears to be’? In respect of the former, presumably, the discussion of UCP 500, article 20 in Crédit Industriel et Commercial v China Merchants Bank [2002] EWHC 973 (Comm) (Sealy and Hooley, pp.834-40, 866-67) (which seems preferable to the views expressed in Glencore International AG v Bank of China [1996] 1 Lloyd’s Rep 135) still holds good, and with respect to the latter the test applied is the view that would be taken by the reasonable banker.

Another difficulty concerns the meaning of ‘original signature’ since a document can be signed by ‘handwriting, facsimile signature, perforated signature, stamp, symbol or another mechanical or electronic method of authentication’ (UCP 600, article 3).

Activity 8.3a. What test do the courts apply in determining whether a discrepancy is trivial or

not?

b. Should a bank accept the following documents:

i. a photocopy marked ‘original’

ii. a photocopy of a document where the document (but not the copy) is marked ‘original’

iii. a document marked as an ‘authorised copy’

iv. an unmarked but clearly original document?

SummaryThe issuing or confirming bank is only required to pay – and, therefore, only entitled to reimbursement – where the documents presented strictly conform to those stipulated in the credit. This rule is consistent with the idea of separation between the underlying contract (for example, the sale contract) and the credit, which means that the banks are not concerned with the performance of the underlying contract. Nevertheless, the bank can accept trivial discrepancies, which may both ease the job of banks and place them in some difficulties.

8.4 Autonomy of the credit


8.4.1 Autonomy of the creditThe documentary credit establishes payment obligations that are separate from the sale contract (UCP 600, article 4). Where the seller is in breach of the sale contract, the buyer has remedies against the seller under the sale contract, but will, normally, not be entitled to prevent payment by seeking an injunction to restrain either the bank from paying or the seller from collecting payment. Furthermore, the issuing bank cannot refuse to pay on the ground that it has not received funds from the buyer or that it has rights of set-off against the buyer.


The autonomy rule reflects the commercial importance of ensuring that confirmed credits impose an absolute obligation to pay and the fact that the parties are dealing with documents rather than goods. The judges have regarded it as important that irrevocable credits are treated as equivalent to cash.

The whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods. This does not permit of any dispute with the buyer as to the performance of the contract of sale being used as a ground for non-payment or reduction or deferment of payment. (Lord Diplock in United City Merchants (Investments) Ltd v Royal Bank of Canada, The American Accord [1983] 1 AC 168 (Sealy and Hooley, pp.843-47).)

Nevertheless, there may be exceptions to the rule.

The first possible exception is sometimes said to be where the beneficiary has expressly agreed not to draw on the credit until certain conditions have been satisfied. The authority for this is Sirius International Insurance Corpn (Publ) v FAI General Insurance Co Ltd [2003] EWCA Civ 470, however, it should be noted that in this case a breach of the conditions would, probably, only have given rise to an action between the parties and not have permitted the bank to refuse payment. Moreover, the case did not involve a sale contract and the documentary credit did not originate in the underlying contract between the parties. In other words, the case cannot be taken as a general authority on the effect of conditions where the documentary credit originated in a sale contract.

Another possible exception is where the fraud exception applies (see 8.4.2).

In some situations where there is illegality, fraudulent misrepresentation, mistake or frustration (see 8.4.3) an exception may apply.

8.4.2 Fraud The bank may refuse payment where there is compelling evidence of fraudulent presentation by the beneficiary or their agent. This issue is not mentioned in UCP 600 and is, therefore, left to local law.

The standard of proof makes it difficult to show that there has been fraud. In English law there is fraud if the beneficiary or their agent presents documents knowing they contain untrue statements and intending they should be acted on by the person receiving the documents. The motive for this act is not relevant (Standard Chartered Bank v Pakistan National Shipping Corpn (No. 2) [2003] 1 AC 959). Where the beneficiary or their agent is not aware of the untruth and has acted in good faith, the bank is obliged to pay as long as the documents ‘appear on their face to be in accordance with the terms and conditions of the credit’ (Lord Diplock in United City Merchants (Investments) Ltd v Royal Bank of Canada, The American Accord [1983] 1 AC 168 (Sealy and Hooley, pp.843-47)). Furthermore, there must be ‘compelling but not irrefutable’ evidence of fraud (Goode (2010), p.1102), so that it is not enough to show that a reasonable banker would think there was fraud (Society of Lloyd’s v Canadian Imperial Bank of Canada [1993] 2 Lloyd’s Rep 579).

Sealy and Hooley (p.850) point out that, ‘it remains a cause of some unease that the seller, however innocent himself, becomes entitled to payment through tender of a document that carries a deliberately false shipping date, when tender of a document giving the true shipping date could have been rejected as discrepant’. (For a vigorous criticism of the view that a mere nullity does not constitute a ground for refusal to pay, see Goode (2010), pp.1104-07.)

There has been resistance to extending the fraud exception beyond the situation where it is the beneficiary or their agent presenting the document who has knowledge of the fraud (United City Merchants (Investments) Ltd v Royal Bank of Canada, The American Accord [1983] 1 AC 168 (Sealy and Hooley, pp.843-47)). But the decision of the Court of Appeal in Banco Santander SA v Bayfern Ltd [2000] 1 All ER (Comm) 776 created some problems. Banque Paribas (BqP) issued a deferred payment letter of


credit in favour of the beneficiary, B, under which payment was due 180 days after the date on the bill of lading (on the different types of payment, see UCP 600, article 7). Banco Santander (BS) confirmed the credit, undertaking to honour it at maturity, but it also offered to pay at a reduced rate before that date, which offer was accepted. B transferred its rights under the letter of credit to BS. Before maturity it was discovered that B might have acted fraudulently. BqP used the fraud exception to refuse to reimburse BS. It was held that the confirming bank bore the risk of fraud and so must suffer the loss (although, of course, it could recover from B). If the case had involved a negotiation credit, BS’s action in discounting the deferred credit would have been authorised and it could have claimed reimbursement from BqP; but here the discounting had not been authorised and so BqP was not liable – its only obligation under UCP 500 was to reimburse payment made on maturity (by which time, of course, the fraud would have been known and BS would not have paid B). The other point was that B had transferred its rights to BS and BS was seeking full reimbursement (not merely the discounted amount it had paid B); BS had taken over the rights of B and BqP had the same defence (fraud) as if B had sought payment. The impact of the decision is limited because of the difficulty of proving fraud and because banks in the position of BS could protect themselves by insisting on being appointed as negotiating bankers under a negotiated credit, so that they were authorised to discount the deferred credit. Nevertheless, the decision caused a good deal of concern and led to UCP 600, article 12, which states that where a bank is nominated to accept a draft or to incur a deferred payment undertaking, it is authorised to discount and is, therefore, entitled to reimbursement irrespective of fraud (see Horowitz, D. ‘Banco Santander and the UCP 600’ (2008) 6 JBL 508). The right to reimbursement arises from the act of negotiating a compliant presentation of documents (Fortis Bank SA/N.V. v Indian Overseas Bank [2009] EWHC 2303 (Comm)).

Activity 8.4a. Acme sells goods ‘fob Liverpool January 2012’, payment by letter of credit. The

goods were, in fact, shipped on 31 December 2011, so Jake, Acme’s agent, alters the bill of lading to avoid difficulties for Acme. The date of shipment makes no difference to the quality or suitability of the goods. Acme is unaware of this action. Advise the paying bank, which has discovered the alteration.

b. How might your answer to (a) have differed if the alteration had been carried out by a third party who was not an agent of Acme, and Acme was aware of the alteration but did not inform Jake of these facts?

c. How might your answer to (b) have differed if neither Jake nor Acme was aware of the alteration?

8.4.3 Other situations where the bank may withhold payment

Illegality of underlying contract

Staughton LJ said that a court would not give judgment for the beneficiary against a bank that refused to pay because the letter of credit was being used to carry out an illegal transaction, such as an illegal sale of weapons (Group Jose Re v Walbrook Insurance Co Ltd [1996] 1 WLR 1152 (Sealy and Hooley, pp.854-55)). Again the bank is placed in a difficult position since it is uncertain what evidence it will require before it can avail itself of this defence. Staughton LJ suggested that it would not be sufficient for the bank to refuse payment merely because the legality was doubtful. In Shanning International Ltd v Lloyds TSB plc [2001] UKHL 31, payment of the credit was contrary to a regulation of the EU implementing United Nations sanctions. The regulation prohibited claims on financial instruments ‘under or in connection with a contract or transaction the performance of which was affected’ by the prohibition, and this included the underlying contract and, therefore, the documentary credit issued as a result of that contract.


Illegality of credit Where the credit is illegal under the law of the place of payment, it will be unenforceable (Ralli Bros v Compania Naviera Sota y Aznar [1920] 2 KB 287).

Mistake or frustration Where a fundamental mistake renders the credit void ab initio, or the obligation to pay is frustrated, the bank will not be obliged to pay.

8.5 Contractual rights and obligations

Many of the contractual rights and obligations have already been discussed.

As has been mentioned, there are five contractual relationships involved in a documentary credit. These are:

The underlying sale contract between the buyer and seller.

The contract between the buyer and the issuing bank under which the bank issues the credit, notifies and pays (either itself or through another bank) the seller, and the buyer undertakes to reimburse the issuing bank.

The contract between the issuing bank and the advising bank, under which the latter makes payments and remits the stipulated documents to the issuing bank, and the issuing bank reimburses the advising bank.

The contract between the issuing bank and the seller under which the issuing bank promises to make the payment.

The contract between the confirming bank and the seller in which the bank undertakes that the seller will be paid against presentation of the stipulated documents.

8.5.1 Applicant (buyer of goods) and issuing bank


The issuing bank must adhere strictly to the buyer’s instructions in issuing the credit. Where there is ambiguity which is not apparent (the bank should seek further instructions if it is apparent), the bank is only required to construe the instructions in a reasonable sense (Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147 (Sealy and Hooley, pp.863-64)). If the bank fails to do this it may not be entitled to reimbursement from the buyer even though the failure did not cause loss and the buyer may recover any resultant loss. If the ambiguity is apparent, the bank should seek clarification if it is reasonable in the circumstances to do so (Credit Agricole Indosuez v Muslim Commercial Bank Ltd [2000] 1 Lloyd’s Rep 275; Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd [1972] AC 741 at 743).

The bank must examine the tendered documents to ascertain whether or not they appear on their face to comply with the stipulation in the credit (see 8.3 above).

The bank may seek to exclude or limit its liability, subject to the provisions of the Unfair Contract Terms Act 1977. The UCP also contain limits on the bank’s liability (UCP 600, articles 34-37). Where a bank uses the services of another bank (such as an advising bank) for the purpose of carrying out the instructions of the applicant, it does so at the risk of the applicant (UCP 600, article 37(a)). The bank assumes no liability if the instructions to that other bank are not carried out, even if they took the initiative in choosing that other bank (UCP 600, article 37(b)). Even where UCP 600, article 37 applies, it only prevents the issuing bank from being liable for loss caused by the other bank involved. The buyer can still reject documents and refuse to reimburse the issuing bank if the documents do not comply.


8.5.2 Issuing bank and advising/confirming bank


The relationship is that of principal (issuing bank) and agent (advising bank), even if the advising bank is instructed to advise the beneficiary or to receive and inspect documents. If the advising bank is also the confirming bank, it is the agent of the issuing bank in its capacity as advising bank, and the principal in its undertaking as the confirming bank to the seller.

The advising/confirming bank that pays according to the issuing bank’s instructions against documents is entitled to reimbursement by the issuing bank where the documents conform on their face (UCP 600, article 7).

8.5.3 Beneficiary (seller) and issuing bank


The key obligation of the issuing bank is to pay the seller against conforming documents, even if there is a breach of the sale contract.

If the issuing bank wrongfully refuses to pay, the seller can bring an action for the value of the credit or the loss suffered as a result of the refusal.

8.5.4 Beneficiary (seller) and advising bankUnder UCP 600, article 9, by advising the credit, the advising bank ‘signifies that it has satisfied itself as to the apparent authenticity of the credit... and that the advice accurately reflects the terms and conditions of the credit’. When compared with UCP 500, this excludes the reference to ‘reasonable care’ in checking the authenticity of the credit, but extends the obligation to include verification of the accuracy.

SummaryA documentary credit enables the seller and the buyer to obtain important safeguards regarding payment under a sale contract. Those safeguards originate in contractual promises by a bank or banks that the money due will be paid, subject to certain conditions being fulfilled. Although credits emerge from the underlying sale contract, they give rise to separate contractual rights and obligations. The banks are not bound by the sale contract, so if defective goods are delivered the fact that the buyer has remedies against the seller does not mean a bank cannot enforce the payment obligations under the credit.


Sample examination questionIn the law relating to letters of credit it is has been said that, ‘the requirement of strict compliance is not equivalent to a test of exact literal compliance in all circumstances and as regards all documents.’ (Evans LJ in Kredietbank Antwerp v Midland Bank plc (1999)).

Discuss.


When confronted by a question like this most students succumb to the temptation to write at great length about the process by which letters of credit are issued, the different types of letters of credit, the rules relating to revocable and irrevocable credits, etc. The question does not ask for this general discussion, so unless it can be related to the question, it will not earn any marks.

This question requires consideration of the strict compliance rule, so it is appropriate to discuss what the rule is and what it seeks to achieve. However, you must also consider the degree of flexibility introduced by the courts and UCP 500 and UCP 600 into the interpretation and application of the rule where there is a ‘trivial’ discrepancy. What is a ‘trivial’ discrepancy and how is it to be distinguished from one that is not trivial? Give some illustrations of cases where discrepancies were and were not trivial: for example, contrast Bankers Trust Co v State Bank of India [1991] with Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1999]. What is the consequence of a discrepancy being trivial?

Consider how far the statement of Evans LJ contradicts the general principle stated by Viscount Sumner, namely that, ‘there is no room for documents which are almost the same, or which will do just as well.’ (Equitable Trust Co of New York v Dawson Partners Ltd [1927]). You might also consider the impact on the banks of this exception to the general principle of strict compliance.


Reflect and review







Ready to move on


Need to study again

I can define and identify the characteristic features of a documentary credit.

I can explain the significance of the Uniform Customs and Practice for Documentary Credits (UCP).

I can identify the different types of documentary credit.

I can explain the steps involved in the opening of a credit.

I can analyse the various contractual relationships.

I can discuss the strict compliance and autonomy of the credit rules.

I can explain the rights and obligations of the parties.


Must revise

Revision done

8.1 Documentary bill (bill of exchange)

8.2 Documentary credit

8.3 Strict compliance

8.4 Autonomy of the credit

8.5 Contractual rights and obligations

Contents

Chapter 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161

Chapter 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

Chapter 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

Chapter 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

Chapter 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

Chapter 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

Chapter 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172

Feedback to activities


Using feedbackFeedback is designed to help you judge how well you have answered the activities in the text. It will show you whether you have understood the question and chosen the correct solutions.

Do not look at the feedback until you have answered the questions. To do so beforehand would be pointless, and even counter-productive. Doing the activities helps you learn. Checking the feedback helps you learn more. Remember that ‘doing’ activities teaches you more than reading does.

You should reflect on what the feedback tells you and note down your thoughts in your portfolio or learning journal.

Commercial law Feedback to activities page 161

Chapter 2

Activity 2.1 Authority refers to the principal’s consent to another party (the agent) undertaking actions on behalf of the principal, but the enforceability of those transactions by and against the principal is conferred by the law. The authority that an agent has arises because of the action of the principal in establishing the agency, but the right of the principal to enforce the contract against the third party and the right of the third party to enforce against the principal derives from the law.

Activity 2.2a. Estate agents act for those who wish to sell real property [e.g. houses]. Normally,

an estate agent’s function is to obtain offers from those who are interested in purchasing; they do not enter into contracts on behalf of the principal. In other words, unlike other agents they do not have the power to bind their principal in contract, and yet they owe fiduciary obligations to their principal (Spiro v Lintern [1973] 1 WLR 1002; see also 3.3.4).

b. Whether or not a relationship constitutes an agency for the purposes of the application of the law of agency is a matter of law. In determining the matter, the courts will look at the entire relationship to see if it conforms to agency as defined by the law. This means that, while the way the parties have characterised their relationship has relevance, it is not decisive. In WT Lamb & Sons v Goring Brick Co [1932] 1 KB 710, L were appointed as ‘sole selling agents’ by G. The court held that the intention of the parties was not to appoint L as the agent of G, but that G would not sell to anyone other than L. In other words, L was the principal in any resale of those bricks. But note that the judges were careful to point out that no general principle can be defined and that each such arrangement must be assessed on its own facts.

Activity 2.3 Dr Thadee de Wittchinsky had sold a necklace entrusted to him by a Russian émigré and kept the money. It was held that he did not act as a mercantile agent. This was for two reasons.

Dr de Wittchinsky had always conducted himself as a lawyer and was regarded as such by those who knew him.

In the transaction at issue, even though the owner had asked him to sell the necklace, the relationship between her and Dr de Wittchinsky was not a business relationship: ‘There was no suggestion of remuneration, and he was acting merely as a friend.’

The significance of the finding that he was not a mercantile agent was that he had no authority to sell and the purchaser acquired no title.

Activity 2.4 Has P consented to A acting as P’s agent in the purchase of the painting? P’s expression of interest in buying the picture at a time when it was not for sale would probably not support the view that he had consented to A going ahead with the deal. Also, P’s consent cannot be implied merely from the fact that he did not respond to A’s letter. (You might return to this question when you have studied apparent authority, see 2.6. But you may also conclude that there is no apparent authority because P made no representation to T that A had authority to act; the representation came from A.)

Activity 2.5 According to Ireland v Livingston [1872] LR 5 HL 395 (Sealy and Hooley, pp.114-15) where the agent construes the meaning of the principal’s language in a reasonable way and ‘with an honest desire to perform their duty to him’, the agent will be taken to have obeyed the principal’s order and acted within actual authority. However, the general principle is that if there is lack of clarity or evident ambiguity, the agent must seek clarification from the principal, unless there is a reasonable excuse for not doing so.


Activity 2.6 The distinction between the cases is difficult but concerns what the third party can reasonably believe the authority of the agent to be on the basis of the representation of the principal. In First Energy, the Court of Appeal took the view that, although J did not have authority to make the decision, his position as senior manager clothed him with the authority to communicate to FE decisions from head office. In Armagas, the manager was held not to be in a position that would lead the third party reasonably to believe that the manager had authority to undertake the transaction. It seems safest to conclude that the courts will, normally, follow the approach taken in Armagas.

Activity 2.7There are a number of possibilities.

The case establishes a new category of agency (but Wills J does not give the impression of having consciously created a new category of agency).

The decision can be explained in terms of estoppel by conduct rather than agency by estoppel (but Wills J seems to have thought the decision fitted into agency law).

The decision is wrong (this is the view of the court in British Columbia).

The decision is a curiosity and as such fascinates academics but has no impact on the judges, who simply ignore it.

Activity 2.8 A French trawler was operated by an English company when France was occupied during the Second World War. This was done with the approval of the British government but without the approval of the French owners. After the war, the French owners were unable to ratify because the company had been an enemy alien at the time of the act and, therefore, not legally competent.

Activity 2.9 The decision in Brook v Hook [1871] LR 6 Exch 89 may be explained in a number of ways (Sealy and Hooley, p.142).

Forgery rendered the note void and there can be no ratification of a nullity (see also Bills of Exchange Act 1882, s.24).

Ratification was not possible because J purported to be H when signing the note and, therefore, there was no indication of the existence of an agency.

It should be noted that if the ‘principal’ is aware of the forgery and takes no action, they may be estopped from asserting the forgery and avoiding liability where the other party has relied on the failure and acted to its detriment. (See Greenwood v Martins Bank [1933] AC 51, where the customer of a bank was aware that cheques were being forged and yet failed to inform the bank, which paid the cheques.)

Activity 2.10 These are the facts of Sachs v Miklos [1948] 2 KB 23. It was held that M could not justify her action on the grounds of agency of necessity. The case demonstrates the limited value of agency of necessity and the unwillingness of the courts to stretch the situations in which it can be used. It is true that such an agency may arise and justify the sale where it becomes impossible to communicate with the owner of goods (as might be said to have been the case here), but the goods must be perishable or require looking after (such as cattle or horses). Moreover, there was no real emergency: it had only become extremely inconvenient to continue to store the goods. Note that under the Tort (Interference with Goods) Act 1977, ss.12 and 13 and sch. 1, a bailee can sell uncollected goods in certain circumstances and subject to certain conditions.


Chapter 3

Activity 3.1 The facts are close to those in Mullens v Miller [1882] 22 ChD 194. As someone employed as an agent to sell a house, there is implied actual authority that A will be able to do those things that are necessarily incidental to effecting such a sale and are tasks usually undertaken by such agents. Making statements (representations) about the house may be necessarily incidental and/or part of such an agent’s usual authority. This means that P is liable for the misrepresentations. In the case, the principal was denied an order of specific performance.

Activity 3.2 a. The company could not ratify because, although the agent purported to act on

behalf of the company, at the time of the contract the company did not exist.

b. It is likely that Jake will not be liable on contract (i), but will be liable on contract (ii). This is because the words ‘For and on behalf of’ indicate that he is signing not on his own behalf but on behalf of Pugwash Ltd, whereas in contract (ii) the use of the words ‘Managing Director’ may be merely a description of Jake and not an attempt to qualify his liability (Universal Steam Navigation Co Ltd v James McKelvie & Co [1923] AC 492; Bridges & Salmon Ltd v The ‘Swan’ (Owner) [1968] 1 Lloyd’s Rep 5). However, we are not given sufficient information to come to a definite conclusion on either of these cases because these words must be construed within the context of the particular contracts and their surrounding circumstances.

Activity 3.3 Liability is strict. There is no need to show that the ‘agent’ acted fraudulently or negligently. There was, for instance, no suggestion that the solicitor in Yonge v Toynbee [1910] 1 KB 215 had any knowledge that their client had become insane and their authority had thereby terminated.

Activity 3.4 a. In Rayner v Grote, X purported to act as the agent of a named principal in a contract

to sell goods. Before delivery the buyer discovered that X was, in fact, the real principal. The buyer accepted and paid for part of the goods. X successfully sued for the buyer’s failure to accept all the goods. It was important that the buyer knew the true situation before the delivery, but still took part delivery.

b. If there had been no performance, a court might have refused to enforce the contract in an action brought by X where the identity of the principal was material because, for example, it was a sale on credit and the creditworthiness of the named principal was important (Gewa Chartering BV v Remco Shipping Lines Ltd, The Remco [1984] 2 Lloyd’s Rep 205).

Activity 3.5It is common in business for principals to wish to conceal their involvement in a deal so as not to alert rivals or to affect the price. The desire for concealment of the principal may come from the agent, who wishes to protect his or her own business by preventing a third party from dealing directly with the principal. More generally, the doctrine fits in with a model of business relations that dominates contract law in which it is assumed that transactions are impersonal and that business people are not concerned about the identity of the party with whom they are dealing. Nevertheless, the need for such an odd doctrine is not obvious. In civil law systems the idea of the commission agent works well: for example, where A is selling goods on behalf of P, A is a principal in relation to the buyer and an agent in relation to P. The idea of commission agents was considered in some nineteenth-century English cases (2.2.3) and see also the more recent decision in Romalpa (2.1.1).


Activity 3.6This scenario is based on the facts of Greer v Downs Supply Co [1927] 2 KB 28 (Sealy and Hooley, pp.180-1). In that case it was held that the circumstances surrounding the sale clearly revealed that T intended to contract only with A because it had been agreed that T could set off a debt owed by A to T against the purchase price. No other party could, therefore, intervene. On this basis Ecma contracted as principal and Mace could not intervene.

Activity 3.7This situation is similar to Cooke & Sons v Eshelby [1887] 12 App Cas 271 (Sealy and Hooley, pp.188-9). In that case, Lord Watson said,

…it is not enough to shew† that the agent sold in his own name. It must be shewn that he sold the goods as his own, or, in other words, that the circumstances attending the sale were calculated to induce, and did induce, in the mind of the purchaser a reasonable belief that the agent was selling on his own account and not for an undisclosed principal; and it must also be shewn that the agent was enabled to appear as the real contracting party by the conduct, or by the authority, express or implied, of the principle. The rule thus explained is intelligible and just…it rests upon the doctrine of estoppel.

Lord Halsbury LC agreed. Lord Fitzgerald, on the other hand, while agreeing with the outcome, was reluctant to found his decision on estoppel. He was content to say that the undisclosed principal did not mislead the third party into believing that the agent was the principal.

Chapter 4

Activity 4.1 His approach is to encourage flexibility in the interpretation of the SGA and to concentrate on determining the common intention of the parties. The difficulty occurs if the provisions of the statute are clear and do not fit in with the common intention of the parties: for example, see the discussion of amendments to the SGA in 1995 (s.20A, see 4.4.8). In addition, the advantage of flexibility in statutory interpretation must be weighed against the importance of certainty: the parties need to be clear in their rights and obligations so that they can plan. Nevertheless, it is useful to keep Lord Diplock’s ideas in mind when studying sales law.

Activity 4.2 a. Contracts in which the seller agrees to take a trade-in as part of the price are within

the SGA. In GJ Dawson (Clapham) Ltd v H & G Dutfield [1936] 2 All ER 232 (Sealy and Hooley, pp.258, 259-60), there was a sale contract where two lorries worth £475 were sold to the buyer for two old lorries plus £250 in cash. The court’s view was that there was a sale of the new lorries for £475 and a subsidiary agreement under which that price was reduced by £225 if the buyer handed over the old lorries. This meant there were two sale contracts: the sale of the new lorries and the sale of the old lorries. If this were not the case, the buyer of the old lorries would not have rights under the SGA.

b. The wrappers form part of the consideration, but since some of the price for the goods is in the form of money the SGA will apply (Chappell & Co v Nestlé Co Ltd [1960] AC 872).

Activity 4.3 a. Future (the goods do not yet exist), unascertained (the goods are not identified

and agreed upon at the time of the contract). Property cannot pass until the goods become ascertained.

b. Future (the machine exists, but it is not the property of the seller) and specific (the machine is identified at the time of the contract and delivery of another machine would not constitute performance under the contract).

† ‘Shew/shewn’ = old-fashioned spelling of ‘Show/shown’.


c. Future and unascertained: at the time of the contract the actual book has not been identified.

d. Existing and specific: the particular bag of flour has been selected at the time of the contract.

Activity 4.4 Where goods are specific or ascertained, property will pass when the parties ‘intend it to be transferred’ (s.17(1)). In this case, the shipbuilding contract provided for payment of the purchase price of a ship by instalments as work proceeded and that after the first instalment ‘the vessel and all materials and things appropriated for her’ became the property of the buyer. The buyer’s surveyor was to approve the building process, including the materials that were to be used on the ship. After two instalments, and with the ship partly constructed, the shipbuilding company went into liquidation. The Court of Appeal held that the unfinished ship was the property of the buyers.

The other issue concerned the materials brought to the yard and approved by the surveyor but not incorporated into the ship. Although the contract used the word ‘appropriated’, Pollock MR construed it as ‘unconditionally appropriated’ because, in his view, this expressed the true intention of the parties. He concluded that what was meant was ‘materials which have been fitted into the vessel, or if they have not been completely fixed upon the vessel are substantially in situ, so that the removal of them would involve a going back upon the work to be done upon the vessel.’ Warrington LJ agreed, interpreting the word as meaning, ‘goods which have been so dealt with that the builder could not use them except for the purposes of the ship, and that the purchasers could not refuse to accept them as part of the ship, but that the mere intention on the part of the builder to use them is not enough to transfer the property to the purchasers’.

Activity 4.5 The fact that the cutting of the timber and the payment of the price are postponed does not necessarily mean that property will not pass, but see the remarks of Diplock LJ in 4.4.2; if it is the seller who is to cut the trees, the property will not pass until the trees are cut (rule 2). The goods are identified at the time of the contract (all the trees), so the key issue is who is to do the cutting of the timber? If it is the buyer, then the seller has done all that is required under the contract and the property in the timber will pass at the time of the contract. See Tarling v Baxter [1827] 6 B&C 360 (Sealy and Hooley, p.303).

Activity 4.6 a. In Elphick v Barnes [1880] 5 CPD 321, a horse was handed over to Barnes by its owner

on the understanding that it would be returned after eight days if Barnes did not think it suitable for his purposes. Through no fault of Barnes, the horse died on the third day. It was held that this was a sale or return arrangement and Barnes was not liable for the price.

b. The horse was handed over for the purpose of determining whether it was suitable for the daughter, by riding the horse himself and racing was Jake going beyond what was necessary to reach that determination? Did Jake thereby adopt the transaction? If he did, he would be liable for the price.

Activity 4.7 Property has passed and the buyer is liable to pay the price. The facts suggest that under the contract the normal rule as to delivery applies, that is the buyer collects from Acme. Where the wheat conforms to the contract, there is no reason for the buyer to dissent from the appropriation by the seller and the buyer cannot extend the period under which the seller is at risk by refusing to take delivery. See Pignataro v Gilroy [1919] 1 KB 459.


Activity 4.8 a. Unless the parties have expressed a contrary intention, it would seem that

property has passed. It is true that something needs to be done in order to determine the price of the goods: they must be weighed. But this does not bring the matter within s.18, rule 3 because it is agreed that the weighing is to be arranged by Fred. Read Turley v Bates [1863] 2 H & C 200 (Sealy and Hooley, p.309).

b. It would seem that the property in the hay has passed because the goods were specific and in a deliverable state. The weighing was merely to check that the right amount had been delivered; it was not a means of determining the price.

c. Read Philip Head & Sons Ltd v Showfronts Ltd [1970] 1 Lloyd’s Rep 140 (Sealy and Hooley, p.307). This does not seem to be a contract for specific goods because the units were not identified at the time of the contract. If that is correct and this is a contract for the sale of unascertained goods, when (if at all) were the goods ascertained? See rule 5(1). Was delivery of the units sufficient? Applying the reasoning of Mocatta J in the Philip Head case would suggest that the units were not in a deliverable state when placed in Jake’s garage because they needed to be constructed and fitted. Therefore, property had not passed to Jake (nor, subject to contrary agreement of the parties, was the seller at risk – see 4.5 on this issue).

d. Was there identification of the bulk from which the buyer’s bullion was to come? The answer would seem to be that in Re Goldcorp there was no such bulk because the stock could be varied at the will of the seller, so s.20A would not have made a difference to the outcome.

Activity 4.9 No feedback provided.

Activity 4.10No feedback provided.

Activity 4.11a. There is a range of risks that parties to a contract of sale may run. Most obviously,

there are commercial risks: for example, a seller, who contracts for delivery at a future date, may find that the price of such goods has risen; a buyer, who intends to resell goods, may find that having bought the goods the resale market price has fallen or demand for the goods has collapsed. But commerce is about the taking of such risks and they are, therefore, not the concern of the Act (although the parties may expressly provide for such risks in their contract). The Act in s.20(1) deals with the risk that the goods will be lost or damaged and that, as a consequence, either the buyer will be required to pay the contract price but will not have the goods, or the seller will be unable to deliver the goods and will be liable in damages.

b. Although the provisions on bulk goods do not cover passing of risk, it may not present much of a problem in practice. The first consideration is what the parties agreed with respect to the risk. There may be an express agreement that risk transfers to the buyer, or risk may have passed in circumstances similar to those in Sterns Ltd v Vickers Ltd [1923] 1 KB 78 (Sealy and Hooley, pp.280-1). Failing this, it might be assumed that risk passes when the buyer acquires a property interest in the bulk, but this is not the same as property in the goods that are the subject of the contract. Since that does not pass until some later time, risk remains with the seller.

Activity 4.12It is certainly more useful to the buyer to use an implied term since this allows for the possibility of requiring the seller to deliver such of the crop as they have produced (HR & S Sainsbury Ltd v Street [1972] 1 WLR 834). If the contract were frustrated, the obligation of the seller to deliver anything would have been removed. Remember, however, that the parties can – and often do – provide in their contract for the possibility of non-performance.


Activity 4.13The representation as to the authority of the ‘seller’ has to be made by the owner to the third party and Farquharsons made no representations to the buyer that the rogue had authority.

Activity 4.14 In this case the Court of Appeal appears to have been rather sympathetic to the plight of the car owner and less understanding of the position of the innocent buyer. The car dealer was a mercantile agent and did have possession of the car with the consent of the owner, but the owner only authorised the agent to obtain offers and not to sell. Previous cases would suggest that in such circumstances the owner had consented to the agent having the goods for a purpose connected with their business as a mercantile agent (Folkes v King [1923] 1 KB 282 (Sealy and Hooley, p.349)). The court did not contradict that position; indeed, statements made by the judges reinforced it. In this case, however, the court held that the reference in the Factors Act 1889, s.2 to ‘goods’ should be construed as meaning the car plus its registration document. Since the owner had not consented to the dealer having possession of the car’s registration document, the agent did not have consent to possession of the goods and, therefore, the buyer did not obtain title.

Activity 4.15 Do not get too distracted by the discussion contained in section 4.8 and focus too much on the exceptions. Remember that the general rule is: ‘where the goods are sold by a person who is not their owner, and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had’ (s.21(1)). This is the rule that will apply in most cases. It is true that the courts have sometimes been diverted by a concern to protect the innocent third party (Pearson v Rose & Young Ltd [1951] 1 KB 275 may be an example of this). Nevertheless, the situations examined in this part of the subject guide are narrow exceptions.

Chapter 5

Activity 5.1 These facts are similar to those in Bunge Corpn v Tradax SA [1981] 2 All ER 513. It was held that the buyer’s failure to give sufficient notice constituted a breach of condition. Determining this involves looking at the contract, but the court was strongly influenced by the fact that the buyer’s breach prevented the seller from fulfilling their obligation. The seller was, therefore, entitled to repudiate the contract and claim damages.

Activity 5.2 X had no title to the car so could not pass title to KM and KM could not pass title to B. B is, therefore, entitled to recovery of the full purchase price without any allowance for the year’s usage. The facts in the problem resemble those in Butterworth v Kingsway Motors Ltd [1954] 1 WLR 1286.

Activity 5.3 These are the facts of Rubicon Computer Systems Ltd v United Paints Ltd [2000] 2 TCLR 453. Although R had the right to sell and title had passed so that there was no breach of s.12(1), R was in breach of s.12(2)(b) because activating the lock amounted to wrongful interference with the goods.

Activity 5.4 a. The House of Lords decided that the words were merely a substitute for the name of

a vessel and that they did not form part of the description for the purposes of the Act. The decision in that case might have been different if it were shown that the quality of the work done at Osaka was substantially better than that done at the yard where the vessel was actually built and that this difference was in the minds of both of the parties at the time of the contract and formed an important part of their agreement.


b. There is no reliance on the attribution by Pugwash and it forms no part of the contractual description.

Activity 5.5 This is a problem posed by Goode in an earlier edition of his book, Commercial law. The circumstances of the sale, including any notices on the packet about health risks, may indicate that the buyer has accepted the risk to health. The seller might be able to assume that because the risk is well known there is no need (leaving aside statutory requirements) to give a specific warning to buyers.

Activity 5.6 The contract was for the sale of a new yacht. At the time of delivery the builder realised the keel was too heavy, informed the buyer and entered into correspondence about remedying the problem. The court concluded that both the evidence of expert witnesses and the correspondence from the seller showed that the overweight keel made the yacht unsafe. Although the cost of remedying the problem was relatively low (£1,600 compared with the purchase price of £236,000), the goods were not of satisfactory quality. Scott V-C commented, ‘Nor is the cost of remedial works any reliable indication of whether the defect which requires to be remedied prevented the yacht as delivered from being of satisfactory quality.’ Hale LJ said:

If a reasonable person had been told in September 2000 that the seller himself had realised that a very large quantity of lead would have to be removed in some as yet unspecified way from the keel of a brand new boat costing nearly a quarter of a million pounds with as yet unspecified consequences for its safety and performance he or she would have had little difficulty in concluding that the boat could not be of satisfactory quality. Had he been told that the seller would later recommend the removal of different quantities of lead, he would have had no difficulty. The seller knew that it was unsatisfactory, hence his commendable attempts to get it put right as quickly as possible.

Activity 5.7 a. The requirement in s.14(2) that goods be fit for all purposes for which such goods

are commonly supplied overlaps with s.14(3), which implies that goods are fit for the particular purpose for which they are bought.

Section 14(3) is concerned only with fitness for purpose, while in s.14(2) this is only part of a broader assessment of whether the goods are of satisfactory quality. Goods may be fit for the buyer’s particular purpose (s.14(3)), and, indeed, fit for all the purposes for which such goods are commonly supplied (s.14(2)), but not be of satisfactory quality: for example, a new car may be fit to drive, but be of unsatisfactory quality because it is scratched and dented.

Under s.14(2), the buyer cannot claim the goods were not of satisfactory quality where they conducted an examination that revealed or ought to have revealed the defect. There is no such requirement in s.14(3), although if the buyer conducted an examination this might indicate they did not rely on the skill of the seller. If there is no reliance the question of whether or not the examination revealed (or ought to have revealed) the defect is irrelevant, the seller will not be liable under s.14(3).

Satisfactory quality is assessed at the time of the sale and those faults that emerge later must be shown to have been present at that time, although a lack of durability will only become evident with use. Fitness for purpose can only be assessed by use of the goods, but again the unfitness alleged must have been present at the time of the sale (see Crowther v Shannon Motor Co [1975] 1 WLR 30, Lord Denning MR).

b. If such a condition is well known in the clothing trade and the buyer contracts dermatitis, the seller might not be able to argue that the jacket was reasonably fit for purpose, although this would depend on whether it was reasonably foreseeable to the seller that a buyer would have the condition. This would require some consideration of the incidence of this sensitivity among potential buyers.


c. Where the buyer is aware of their condition, but chooses to buy and wear the jacket, then the state of the seller’s knowledge is irrelevant because there is no reliance on the seller.

d. See Teheran-Europe Co Ltd v ST Belton (Tractors) Ltd [1968] 2 QB 545 (Sealy and Hooley, p.392). Although the goods were bought for the particular purpose of reselling and this was known to the seller, it may not be reasonable for the buyer to rely on the seller’s knowledge of the laws of Ruritania (unless they profess such knowledge). Indeed, where the buyer is arranging to export to another country, it seems more probable that it is the buyer that has the expertise.

Chapter 6

Activity 6.1Is there a breach of s.13 here? The decision in Arcos v Ronaasen [1933] AC 470 would suggest that there is. It was said that, ‘If the seller wants a margin he must and in my experience does stipulate for it’ (Lord Atkin). That case has been doubted by some commentators, but it was a ruling of the House of Lords and has been supported in later cases (Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441; Reardon Smith Lines Ltd v Hansen-Tangen: The Diana Prosperity [1976] 1 WLR 989). Where there is a sale of unascertained goods specification of those goods may be an important part of the description. Nevertheless, those cases must be read in light of changes to the SGA. In a non-consumer sale it must be asked whether the breach is so slight as to make it unreasonable to reject the wood, in which case the remedy will lie in damages (s.15A(1)(b)). In any event, these issues concerning compliance with s.13 and the application of s.15A(1)(b) are not affected by the buyer’s motive for seeking to reject the goods. In other words, it is irrelevant that Acme seeks to reject them, not for reasons concerning the goods, but because they can be obtained more cheaply elsewhere.

Activity 6.2a. This problem is raised by Sealy and Hooley, p.451. Jake can reject the entire

consignment; or he can take the brandy and reject the whisky, in which event he must take all eight bottles of brandy.

b. The general rule is that acceptance occurs when the buyer has intimated to the seller that they have accepted the goods (s.35(1)(a)). The buyer is not deemed to have accepted merely by agreeing to repair of the goods (s.35(6)(a)). Normally, acceptance will not take place where the buyer has not had ‘a reasonable opportunity of examining’ the goods (s.35(2)). It is possible for the buyer in a non-consumer sale to waive the right to examine, but there seems no suggestion that this has been done here. However, the delay in the initial examination of the goods may be sufficient to constitute acceptance under s.35(4). What amounts to ‘the lapse of a reasonable time’ depends on whether the buyer has had a reasonable opportunity of examining the goods and, of course, that will vary according to the nature of the goods. The test will not take account of the individual circumstances that prevented Jake from examining the goods, unless these were in the contemplation of the parties at the time of the sale contract. So, the fact that business pressures prevented Jake from examining them will not, in itself, extend the definition of a reasonable time. Where the goods, as apparently here, are not complex and they are to be used in business, it would seem that a reasonable time has probably elapsed by 1 February. If for this reason Acme have accepted the goods, their remedy lies in damages for loss caused by the breach of the implied terms in s.14(2) and 14(3).

Activity 6.3a. Damages for the breach are assessed according to the market price because it would

be reasonably foreseeable that a failure to deliver would lead to the buyer buying in the market in order to fulfil the obligation under the contract with Mace (Rodacanachi v Milburn [1886] 18 QBD 67; Williams v Agius [1914] AC 510; The Arpad [1934] P 189). The


difference in the market price in August affects the damages: nominal if the price is lower than the contract price; £10 per ton if the price is £110. The fact that Ecma bought the wheat on 3 September when the market price was higher is irrelevant. (If there is no market price, the sub-sale might be evidence of the value of the goods.)

b. Ecma is not obliged to accept this repudiation and may continue to urge Acme to fulfil its obligation, giving them a reasonable period of time within which to deliver. If Ecma continues to fail to deliver, the market price will be set at the expiry of that period of time (Tai Hing Cotton Mill Ltd v Kamsing Knitting Factory [1979] AC 91).

Activity 6.4 Can Jake reject the goods, or has he accepted them and is, therefore, only entitled to damages (s.11(4))? If it is suggested that by reselling the wine Jake has done an act which is inconsistent with the ownership of the seller (s.35(1)(b)), Jake could argue that delivering goods to another under a sub-sale does not constitute acceptance (s.35(6)(b)) and also that he has had no opportunity to examine the wine (s.35(2)). Opening and drinking some wine from a bottle may be the only way to examine the goods and will not amount to acceptance, even though such an act destroys part of the goods. The problem does not mention how long Jake has had the wine and it might be that a reasonable time has lapsed (s.35(4)), in which event Jake would be deemed to have accepted the wine.

Activity 6.5 Acme can only bring an action for the price where property has passed. The fact that it was Ecma’s failure to unbolt the machine that prevented property passing is irrelevant (Colley v Overseas Exporters Ltd [1921] 3 KB 302 (Sealy and Hooley, pp.410, 411)).

Activity 6.6 It would seem from these facts that this is a contract for the sale of specific goods and that property passed at the time of the contract (s.18, rule 1). Acme could bring an action for the price because property has passed (s.49(1)). In the alternative Acme could bring an action for damages under s.50(1), with the measure of such damages being based on s.50(2) or s.50(3).

Activity 6.7 No feedback provided.

Activity 6.8This decision illustrates the essential feature of the lien, which is that the unpaid seller must have retained possession of the goods. Goods were delivered to the buyer’s agent. The goods were returned to the seller for repacking. Before this was completed the buyer became insolvent. It was held that the seller, although unpaid, could not claim an unpaid seller’s lien because property and possession had vested in the buyer.

Activity 6.9Although a retention (or reservation) of title clause and a charge create proprietary interests, the distinction between them is of great significance to the seller and to the buyer. The aim of a retention of title clause is to prevent property from passing to the buyer until the price is paid and thereby protect the goods from becoming available to the ordinary creditors on the insolvency of the buyer. It must be remembered that, even if the clause is successful, it does not mean that the buyer cannot wrongfully pass good title to an innocent sub-buyer. Where property has passed to the buyer and the attempt by the seller to retain title merely creates a charge over the goods as security for the price, this charge will be void unless registered under the Companies Act. Granting the charge may constitute a breach of the buyer’s obligations to other creditors, which may enable those other creditors to require early payment. Another practical point is that registering a charge is often viewed as cumbersome.


Chapter 7

Activity 7.1 a. The bill of lading has three functions:

it is evidence of the terms of the contract

it is a receipt for the goods

it is a document of title to the goods.

b. Devlin LJ identified three main types of fob contract:

‘Classic’ fob: the parties to the sale contract agree that B (the buyer) will nominate a ship on to which S (the seller) will load the goods. On loading, S receives from the ship’s master the bill of lading. The bill is taken either in S’s name or B’s name as consignor. S forwards the bill to B so that B can collect the goods or can resell them.

S arranges space on the ship, enters into a contract of carriage, loads the goods and receives the bill of lading in S’s name. The bill is forwarded to B in exchange for payment. The contract price will not include the cost of carriage, which is met by B.

B enters into a contract of carriage and S is merely required to load the goods. S receives a mate’s receipt (a simple receipt for goods loaded), which is forwarded to B and which enables B to obtain the bill of lading. This is probably the commonest type of fob contract. S is likely to be a party to the contract of carriage (in addition to B and the carrier) in so far as it affects S. (Pyrene is an example of this type.)

Activity 7.2 a. The goods sold must be fit for their particular purpose and this applies to the

packaging (s.14(3)). The parties contemplated sea transit and if the packaging did not afford reasonable protection for such carriage the seller is in breach of the implied condition, unless the buyer agreed to this form of packing (George Wills & Sons Ltd v Thomas Brown & Sons [1922] 12 Ll L Rep 292).

b. If (as is usual) the buyer is required to nominate the ship and has done this in reasonable time to enable the seller to fulfil their obligation, then merely bringing the goods alongside does not fulfil the obligation to deliver the goods. The seller is required to put them on board (‘over the ship’s rail’). The reason for not loading would not excuse the breach (All Russian Co-operative Society v Benjamin Smith [1923] 14 Ll L Rep 351).

c. This constitutes a breach. The goods are required to be loaded in April, not March (Bowes v Shand [1877] 2 App Cas 455).

d. The presumption in s.20, SGA does not apply to fob contracts. Risk will usually pass on shipment even though property has not passed (see Stock v Inglis [1884] 12 QBD 564).

e. On similar facts, it was held in J & J Cunningham v RA Munro & Co Ltd [1922] 28 Com Cas 42 that risk had not passed to the buyer so that the buyer could reject the goods.

Activity 7.3 a. Where the parties have not stipulated a particular type of vessel, the obligation is

to ship on a vessel that is reasonably suited to the voyage. A barge is not reasonably suited and the buyer can claim for the loss (s.32(2); T W Ranson Ltd v Manufacture d’Engrais et de Produits Industriels, Antwerp [1922] 13 Ll L R 205).


b. The obligation of the seller is either to ship the goods or to procure documents that cover shipped goods. The seller breaches this obligation if the goods have never been shipped. Note also there is an implied condition in the bill of lading that it is an accurate record of the shipment (Hindley & Co v East Indian Produce [1973] 2 Lloyd’s Rep 515).

c. The contract of carriage is void for illegality and this renders the bill of lading invalid. The buyer is, therefore, not obliged to accept it (Arnhold Karberg & Co v Blyth, Green, Jourdain & Co [1915] 2 KB 379).

d. The only question here is, was the insurance cover reasonable in light of the circumstances at the time the policy was concluded? If it was not reasonable to insure for war risks, the buyer must accept the documents and pay for the goods, even though they have been lost and are not covered by the policy (Manbre Saccharne v Corn Products Ltd [1919] 1 KB 198).

Activity 7.5 What did the parties agree about the passing of risk? The question here does not say whether this is a cif or fob contract, but it does not matter since in both the general presumption is that risk will pass on shipment. The parties may expressly agree that risk passes at a different time, but that would be unusual. Acme therefore bears the loss.

Activity 7.6 a. Read Berger & Co Inc v Gill & Duffus SA [1984] AC 382. The House of Lords held that

the duty to deliver conforming documents and the duty to deliver conforming goods are separate obligations. The buyer cannot reject the goods until they have been delivered and cannot use any defect in them to justify a wrongful rejection of the documents. The rejection of the documents must be justified on the basis that they are non-conforming. The decision has been strongly criticised (see Goode (2010), p.1050; Treitel [1984] LMCLQ 565 (in your study pack)).

b. This will depend on whether the seller has an opportunity to cure by making a fresh tender of the correct documents and that is determined by the contract. Is there a time limit and can the new tender be made within that time limit? If there is no time limit, the documents must be tendered ‘as soon as possible’ after shipment and whether there is sufficient time for a fresh tender will depend on the meaning of ‘as soon as possible’ in the particular circumstances. (Sanders Brothers v Maclean & Co [1883] 11 QBD 327).

Chapter 8

Activity 8.1 There are five contractual relationships involved in a documentary credit. They are:

the underlying sale contract between the buyer and seller

the contract between the buyer and the issuing bank under which the bank issues the credit, notifies and pays (either itself or through another bank) the seller, and the buyer undertakes to reimburse the issuing bank

the contract between the issuing bank and the advising bank, under which the latter makes payments and remits the stipulated documents to the issuing bank, and the issuing bank reimburses the advising bank

the contract between the issuing bank and the seller under which the issuing bank promises to make the payment

the contract between the confirming bank and the seller in which the bank undertakes that the seller will be paid against presentation of the stipulated documents.


Activity 8.2 a. Although the documentary credit arises out of the payment obligation in the

sale contract, the contracts that comprise the documentary credit and the sale contract are autonomous. So the bank is only required to ensure that the documents presented comply with those stipulated in the credit.

b. The stipulation in a credit that the goods were ‘new’ was not met by the tender of documents describing them variously as ‘in new condition’, ‘new, good’ and ‘new-good’ (Bank Melli Iran v Barclays Bank DCO [1951] 2 Lloyd’s Rep 367 (Sealy and Hooley, p.829)).

c. There was no compliance where the credit called for a certificate of quality issued by ‘experts’ and the seller tendered a certificate issued by one expert (Equitable Trust Co of New York v Dawson Partners Ltd [1927] 27 Ll L Rep 49 (Sealy and Hooley, p.829)).

d. These are the facts of Glencore International AG v Bank of China [1996] 1 Lloyd’s Rep 135 (Sealy and Hooley, p.833)), where it was held that the wording in the invoice was not inconsistent with that stipulated in the credit.

Activity 8.3 a. The test would seem to be that a discrepancy is trivial where there is no ambiguity

as to meaning, so that a reasonable banker would recognise the error and the true meaning. If the reasonable banker (assuming no knowledge of the underlying contract or the particular trade involved) would be uncertain as to the true meaning of the document, the discrepancy is material. See the discussion in Kredietbank Antwerp v Midland Bank plc [1999] 1 All ER (Comm) 801 (Sealy and Hooley, p.831).

b. i. The bank should accept the document.

ii. The bank should not accept this copy because it is not the original document and has not been marked as original.

iii. The note ‘authorised copy’ acknowledges that this is not an original document and should not be accepted as such.

iv. The bank must accept the document. In Kredietbank Antwerp v Midland Bank plc [1999] 1 All ER (Comm) 801, Evans LJ said that UCP 500, article 20(b) is concerned only with the circumstances in which documents that appear to be copies can be presented as originals and it does not apply to documents which are originals (see Crédit Industriel et Commercial v China Merchants Bank [2002] EWHC 973 (Comm) (Sealy and Hooley, pp.834-40, 866-7)). UCP 600, article 17(a) states the basic rule that original documents must be presented and the rest of that article is concerned with non-originals that can be treated as original.

Activity 8.4a. This would constitute a fraud and the bank is not required to pay where there is

compelling evidence of fraudulent presentation by the beneficiary or their agent. Jake’s motive is irrelevant; the only issue is his knowledge about the document.

b. The answer would be the same where the knowledge of the fraud is that of the beneficiary rather than of its agent. The fact that the alteration was not undertaken by the beneficiary or the agent is irrelevant.

c. This is not fraud, although this is more controversial since it leads to the conclusion that the bank must pay even though the document is false.

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