Impetus for section 12 reform

Write a memorandum to a Law Reform Commission explaining the current scope of section 12 of the Sale of Goods Act 1979, the practical problems which it has created and evaluate the case for reform of the section

This question entails discussion on the scope of section 12 of the sale of goods act 1979, its underlying problems and any impetus for reform that may arise from these problems. Section 12(1) SOGA, implies into contracts for the sale of goods an undertaking as to title1. Section 12(2) implies undertakings as to freedom from encumbrances and quiet possession2.

Section 12(1) incorporating amendments made by the supply of goods (Implied Terms) Act 1973 provides; “In a contract of sale other than one to which subsection (3) below applies, there is an implied condition 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 an agreement to sell, he will have such a right at the time when the property is to pass"

This implied undertaking is a condition and the liability imposed is strict and does not depend on any fault or knowledge of the seller. What does constitute ‘a right to sell the goods’? It is not vital that the seller actually has title to the goods. It will be sufficient that the seller sells with the consent of the party in whom the title is vested; for example where the seller sells as agent of the owner but appearing to be the principal in the transaction. [2] 

Alternatively, however, the fact that the seller actually has and transfers the property in the goods does not mean that a breach of s12(1) is possible. Such a sale could infringe a trademark, patent or other proprietary interests and entitle the holder of the right in question to prohibit the sale.

There are various areas in which the law has evolved to create practical problems to prospective litigants. As far as cases of section 12 of SOGA 1979 are concerned, there are inconclusive and sometimes conflicting authorities and judgment cited in favor of public policy and the flood gates arguments put forward by LJ Denning.

In Niblett v Confectioners Materials Co Ltd [1921] 3 KB 387, the seller sold to Buyer 1000 cases of condensed milk in tins which bore the label of Nestles Condensed Milk Co. Nestles complained and threatened with legal action for this infringement. The tins were detained in customs and buyer was compelled to remove the labels in order to secure the release of the goods. The tins then could be sold at a reduced price. The court of Appeal held that the buyer was entitled to damages for breach of s12(1) by the seller, even though the seller had passed the property in the goods to the buyer. The seller was obliged not only to pass good title but also ensure that the goods did not infringe the trademark of the third party so as to enable the third party to restrain sale.

Contrastingly, in Microbeads AG v Vinhurst Road Markings Ltd [1975] 1 All ER 529, the patent must have been current at the time that the contract of sale took place if an action under s12(1) is to be successful. In that decision, a company which was not a privy to the contract subsequently acquitted the patent to the road-marking machines that were the subject of the contract and tried to bring an action under s12(1) which failed. However, they did manage to claim damages under s12(2)(b) in regards to infringement if the warranty implied by that statute.

A ‘right to sell’ must further be contrasted with a power of sale. In certain cases where the seller does not have a right to sell the goods as against a third party he may still be able to continue with the sale under one of the many exceptions to the nemo dat quod non habet principle, whereby a non owner may pass to the buyer a good title. Most commercial law experts, agree that in such cases there is a breach of the s12(1) condition, since vis-à-vis the true owner the disposition is unlawful. In this instance, the buyer cant sue for damages as he did not suffer any loss. There is yet a conclusive authority to this judgment, however, the case of Barber v NWS Bank [1996] 1 All ER 906, suggest that buyer can reject the goods in these circumstances.

Atkins LJ, in Niblett put forward a view that; ‘ It may be that the implied condition is not broken if the seller is able to pass to the purchaser a rught to sell notwithstanding his own inability’. Both professor Atiyah and Goode has rejected this argument. The editors of Benjamin on Sale of Goods, however think that it is insufficient for a breach of s12(1) that the seller could be restrained by process of law from selling the goods. They suggest that nibblet, does not lay down any general principle to the effect that there is a breach of s12(1) whenever the seller could be restrained by law from selling the goods, and that s12(1) does not extend to cases where the possession of the buyer could not be restricted as where he has taken a good title in nemo dat exception. There is, therefore, some divergeance of views on the interrelation of nemo dat and s12(1).

Where the seller’s right to sell the goods is in the same way doubtful then it is submitted that it should be up to the seller and not the buyer to substantiate that title. The buyer should not have to bear the difficulty and expense of proving he took a good title.

A breach of condition normally entitles the innocent party either to repudiate the contract and claim damages, or to claim damages for any loss suffered on the breach. With s12(1) where the breach is a failure by seller to pass a good title, to the goods there is a third possibility open to the buyer. This was established in Rowland v Divall [1923] 2 KB 500.

In Rowland, the buyer bought a car from the seller for ₤ 334 and proceeded to use it for four months. The buyer then discovered that the car had never belonged to the seller who was a bona fide purchaser of value, with not title. The car was claimed by the true owner, and the buyer sued the seller seeking return of the ₤ 334 purchase price. The court of Appeal, held that the buyer could recover the entire purchase price and that the seller couldn’t set off anything for the four months use by the buyer. There was a total failure of consideration and the buyer could therefore recover the whole of the purchase price. Atkin LJ observed that buyer had received no benefit, namely, the property and the rights to possess and the consideration had therefore totally failed.

In Butterworth v Kingsway Motors Ltd [1954] 1 WLR 1286; [1954] 2 All ER 694 a hire purchase finance company let a car to A on hire purchase. A mistakenly, thought that she had ‘a right to sell the car’ provided she continued to pay the hire purchase installments, and she purportedly to sell it to B. The car passed through several hands and finally the defendant sold it to the claimant for ₤ 1,275. After the claimant had used the car for nearly a year, he received a notification from the finance company claiming the delivery up to them of the vehicle. The plaintiff therefore claimed from the defendant the whole purchase price for the breach of s12(1). Within a week however, A paid the final installment, so the title passed to her and this fed the defective titles of all the subsequent purchasers.

It was held that the claimant could recover the whole purchase price for the defendant’s breach if s12(1). Nothing done after the claimant had claimed this money could affect his right to it, so the ‘feeding’ of the claimants title could be ignored. The market had in fact dropped and the car by the time worth only ₤ 800; thus the claimant made a profit of ₤475.

If A had acquired title to the car and such title had passed to the plaintiff before he rejected the goods, then its submitted that there would have been a total failure of consideration and it would not have been open to the claimant to recover the full purchase price. The claimant could however sue in damages since he would have for almost one year have been under the risk of repossession by the true owner.

No decision was reached in Butterworth on whether such a ‘feeding’ of the buyers title could operate to prevent an action for total failure of consideration. Pearson J however, considered that it would be an extraordinary position if the claimant, should, where good title has already passed, seek to say that ‘there has been a total failure of consideration by the purchaser of this car, although here is the car in my possession and I am entitled to retain it against the world’.

By contrast, Sheil J, in West (HW) Ltd v McBlain [1950] NI 144, rejected the proposition that the buyers title could be fed so as to avoid an action for total failure of consideration. He stated that the subsequent acquisition by the seller of a good title could not affect the remedies the buyer since ‘you cannot revivify that which has never had life’.

The editors of Benjamin submitted that despite difficulties with the strict wording of s12(1), no action for total failure of consideration but only for damages should lie in the above circumstances.

The main principle laid down in Rowland v Divall [1923] 2 KB 500 is very much to be desired and unsatisfactory. The claimant had free use of the vehicle for a year and had made a significant profit from it (₤457). Atiyah reasons that, in which the absurdity of the principle.

The real problem arises from the fact that in Rowland, operates even where the buyer has, in fact has the use and enjoyment of the goods free from claim by third parties. It was noted that the buyer should not be allowed to claim the purchase price unless a third party has in fact made an adverse claim against him and even then consideration should be taken off the amount of actual uninterrupted enjoyment of the goods that he has had.

Included within s12 are warranties which are implied. Section 12(2) mixes with amendments the original ss12(2) and 12(3). Section 12(2) makes provisions that except where a limited interest is sold, there is an implied warranty that; ‘(a) 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, and (b) the buyer will enjoy quiet possession of the goods except in so far as it may be distributed by the owner or other person entitled to the benefit of any charge or encumbrance so disclosed or known.’

The significance of s12(2)(a) which is the implied warranty of freedom from undisclosed charges and encumbrances, is limited, since in most cases, the charge will be defeated by a sale to the purchaser without notice. The third party, who is not in actual possession of the goods will only rarely therefore have an encumbrance which will bind the bona fide purchaser of value.

The buyer can’t treat the contract as repudiated by reason of a breach in s12(2)(a) and can only claim damages for breach of warranty only. The damages measure will normally be the amount necessary to discharge the charge in question coupled with any legal costs incurred and paid in attempting to reasonably to resist an adverse claim.

The warranty of quiet possession in s12(2)(b) protects the buyer until he disposes of the goods. The measure of damages for breach depends heavily on the circumstances; for example if the buyer loses possession the measure will prima facie be value of goods at the time of lost together with any special damage suffered in connection with the lost.

The warranty in s12(2)(a) unlike s12(1) will be broken, by the mere existence of charge or encumbrance over the goods and doesn’t depend on actual enforcement of the charge or encumbrances by claim or demand in the part of the third party. There will be no breach in s12(2)(b) unless the buyer suffers some physical interference with his possession of the goods. In Niblett, Atkin LJ considered that s12(2)(b) had been breached since the buyers had to strip of the labels before assuming possession of the goods. In Microbeads, the Court of Appeal said that a breach had occurred upon the claim for infringement being made by the patentee of a patent over the goods.

Section 12(2) protects the buyer against any wrongful disturbances of his possession by the seller himself. In Rubicon Computer Systems v United Paints Ltd [2000] 2 TCLR 453, United Paint’s contracted with Rubicon for the latter to install a computer system for them.

A dispute about payment ensured in which Rubicon installed time-lock system into Paint’s computer. The Court of Appeal considered, that the installation of the time-lock was both repudiatory breach of contract and a breach of implied terms in s12(2)(b) i.e. the buyer was entitled to quiet possession of the goods. Reliance on s 12(2) is only where the third parties interference is lawful. The law will be impractical if every seller warrants that no third party would ever interfere even unlawfully with the buyers possession.

The law of Contract comes into play here. The prohibition in s6(1)(a) Unfair Contracts Term Act 1977 (UCTA), against exclusion or restriction of liability applies equally to liability arising under s12(2) as it does to liability under s12(1). Hence, the implied terms of s12(2) will apply notwithstanding any contractual term to the contrary.

Two distinctions between the effects of s12(1) and s12(2) should be noted: 1) Time in the Limitation Act runs against the buyer from the date of the sale, under s12(1). Under s12(2), there is a continuing warranty of quiet possession hence time runs against the buyer from the date the possession is disturbed.

2) The seller may in certain circumstances have a ‘right to sell’ under s12(1) and yet may be unable to sell the goods free from third party rights, as where a debtor sells goods which have already been ‘seized’ although not physically removed by the police. Where such goods are sold, the seller has a right to sell them but will sell subject to the rights of the police. Where the buyer subsequently has to give the goods to the police, he would have a remedy in damages under s12(2) not s12(1).

Section 12(2)(a) is of limited practical importance. It has however been involved in a major case; Microbeads AG v Vinhurst Road Markings Ltd [1975] 1 All ER 529, (supra). Here, the buyers quiet possession was disturbed by the holder of the patent which was granted after the sale in question. There was no breach of s12(1) since at the time of the sale the seller had a right to sell. The buyer did recover under s12(2) however for disturbance to his possessions.

There is an impetus for reform from various quarters on the need to make section 12 more coherent and logic. The Law Reform Commission 12th Report (1966 Cmnd Reports 2958), recommended that the buyer should not be able to recover the price in full with no allowance for the use of the goods that he has had. The Law Commission considered the problems in its Working Paper No 65 (1975) where a number of proposals were made about the value of unjust enrichment, but came to no conclusion about that matter.

It returned to the problem in its report Sale and Supply of Goods (Law Com No 160, Cmnd 137 (1987)) and reached the conclusion at page 57;

‘We have come to the conclusion that any reform of the law along the lines we previously considered would not be an improvement and indeed that problems of unjustified enrichment would not be solved by requiring the buyer of goods with defective title to make a money allowance in favor of another person who also does not have a valid title to the goods. The problem in English Law of the true owner being able to bring an action in conversion, claiming the full value of the goods, against either the seller or the buyer adds an extra layer of complexity to even the simplest solution.

We do not believe that the introduction of complex provisions in this area would benefit either buyers or sellers, and we therefore make no recommendation for change in the law governing the buyer’s rights on termination of a contract due to the supplier having had no right to sell the goods at the time when the property was to pass.’

Note the two further points suggested in the reform of s12(1). They are the time at which s12(1) condition must be satisfied and the exclusion of s12(1). The former in the case of a contract of sale, in which the seller must have a right to sell at the time of the sale. In Butterworth, there was a breach of s12(1) even though at the same time of the litigation the property was hold by the claimant. In the case of an agreement to sell, the seller must have a right to sell at the time when the property is to pass.

The former deals with UCTA. Prior to the Supply of Goods (Implied Terms) Act 1973, it was possible to contract out of the implied condition of title. The situation is now governed by the Unfair Contract Terms Act 1977 (UCTA). Section 6(1) of UCTA renders void any terms of the contract of sale or of any other contract exempting the seller from all of any of the provisions of s12. This will inevitably prevent the exclusion of the conditions in s12(1) and also the warranties in s12(2).

Under s6(1)(a) UCTA 1977, liability for breaches of obligations under s12 SOGA 1979, cant be excluded ir restricted by reference to any contract term. This prohibition is not limited to ‘business liability’. The condition implied by s12(1) will therefore be implied notwithstanding any contractual provisions to the contrary.

To conclude, the various practical problems and reforms that have stemmed from earlier and previous cases seem to lack certainty in the law. As conflicting cases and inconclusive judgments are cited, the law on the right to sell goods has evolved in an amoeba fashion, adapting to circumstances and situations. Due to judicial law making and judicial creativity, the law is evolving to adapt to the ever increasing commercial transactions and the increase in the pool of prospective litigants waiting to exercise their rights as consumers in this ever changing commercial market.