The buyer in possession exception

“Critically analyse the buyer in possession exception to the nemo dat quod non habet rule”

This assignment questions is mainly concerned with the transfer of property/title by a non-owner, or a person with a defective title, which is fundamentally governed by the Sale of Goods act 1979 under sections 21- 26. The general rule summed up in the ancient maxim ‘nemo dat quod non habit', subject to the act under section 21,

“Where 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…”

Nevertheless, the Act under section 21(2), does not affect the requirements of the Factors Act or any enactment enabling the apparent owner of goods to dispose of them as if he were their true owner. At one time the only exception to this was sale in market overt, due to commercial pressures numerous exceptions to the general rule, which aim to give a degree of protection to bona fide purchasers as well as original owners have been introduced. This has been achieved by statute and common law, while the concept of market overt itself has been abolished.

The Sale of Goods Act 1979 codifies a number of exceptions to the nemo dat ruled whose origin lies in the common law. Section 21 refers to agency, not an exception at all, especially since the act of the authorised agent is the act of the principal. However, the first exception which is estoppel by agency is a different matter. The provision of estoppel under s 22(1), the rule of common law is that the owner will be estopped from denying the title of a third party where the owner allows an unauthorised individual to exercise a non-existing authority, to appear acting with authority. The second common law exception under s23 stats that, if title is transferred to a rogue under a voidable contract, the rogue has the power to transmit a good title at any time until the owner avoids the contract. Nevertheless, the buyer acquires a good title to the goods, provided he buys them in good faith and without notice of the seller's defect of title. Until its abolition by the Sale of Goods (amendment) Act 1995, a third common law exception, codified as s 22(1) of the Sale of Goods Act 1979, existed to protect purchasers of goods in market overt.

The second exception to the nemo dat rule is alluded to in s 21 (2)(a) of the Sale of Goods Act 1979, which declares ‘nothing in this Act affects the provisions of the Factors Acts or any enactment enabling the apparent owner of the goods to dispose of them as if he were their true owner'. The statute uses the term ‘mercantile agent' instead of the obsolete ‘factor', as defined in the Factors Act 1889, s 1(1); the definition of a mercantile agent is someone who has a business, and who in the course of that business buys or sells goods for other people. However, an exception applies where the mercantile agent has in the course of his business possession of the owner's goods for the purposes of sale, consistently with the traditional but now obsolete meaning of the word ‘factor'. The effect of the exception set out in s 2 is that in the special case where goods are in the possession of a mercantile agent, the ruling in the well known case Jerome v Bentley which illustrates the nemo dat rule, are however reversed, this can be seen in the case Weiner v Harris.

Sale under power of sale or court order would be the third exception, this falls under s 21 (2)(b) states that, ‘the validity of any contract of sale under any special common law or statutory powers of sale, or under the order of a court of competent jurisdiction'. This section deals with situations where a sale of goods may be effected without the owner consenting, this can take place where goods may be sold under common law powers by a pledge, this can be seen in the case of Re Hardwick, ex p Hunnard. The court may also order a sale of goods, either under its inherent powers such as enforcing a charge or pursuant to the rules of the court, this can take a form of disposing of the goods which are perishable or likely to determinate, this may well enough take place even against the wishes of the owner, this can be seen in the case Larner v Fawcett.

Section 23 provides the forth exception which is, a Sale under a voidable title s 23 states: ‘when a 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 good title to the goods, provided he buys in good faith and without notice of the seller's defect of title'. This section confirms the common law rule that if the seller of goods has a voidable title to them, and it has not been avoided at the time of sale, then the buyer acquires a good title provided that he buys in good faith and without notice of the seller's defect of title. Voidable titles usually take the form of where goods have been obtained under a contract induced by misrepresentation. Undue influence, duress and drunkenness may also be grounds to a voidable contract. In the case of Cundy v Lindsay it was renowned that a voidable transaction must be distinguished from one which is wholly void, such as on the grounds of mistake of identity this can be illustrated in the case Lewis v Averay.

The fifth exception is the sale by seller continuing in possession; this exception to the ‘nemo dar' rule is contained in s 8 of the Factors Act which is reproduced with only minimal changes in s 24 Sale of Goods Act which provides: ‘where a person having sold goods continues or is in possession of the goods, or the documents of title to the goods, the delivery or transfer by that person…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 the previous sale, shall have the same effect as if the person making the delivery or transfer were expressly authorised by the owner of the goods to make the same.'

However, it is regarded as insufficient that the seller should just resell the goods, as there must also be a ‘delivery of possession' of the goods or documents of title to the second buyer. Nevertheless, physical delivery of the goods is not necessary, as constructive delivery will be sufficient. The case of Michael Gerson (Leasing) Ltd v Wilkinson illustrates the above point, it was also stated in this case that there must have been a prior moment in which possession had been constructively delivered to a buyer.

It was decided by MacKinnon J in the case of Staffs Motor Guarantee Ltd v British Wagon Co Ltd, that the possession of a mercantile agent, for the purposes of s 2 of the Factors Act 1889, had to be possession in his capacity as mercantile agent; it was also stated that the seller's continuous possession was qua hirer and not qua seller and this was fatal to Staff Motor's claim. However, the Staffs Motor decision has not been regarded as good law, as It was latter decided that the ‘qua seller' gloss is not to be put on the phrase ‘continues or is in possession', contrary to s 24 the seller must remain in unbroken possession thought. The new construction was first put forward in the case Pacific Motor Auctions Ltd v Motor Credits Ltd, which is now regarded as the leading case on S 24, the case of Worcester Works Finance Ltd v Cooden Engineering Co Ltd and Michael Gerson (Leasing) Ltd v Wilkinson have also taken the same approach.

Section 24 not only refers to cases where the seller is in possession of the goods, but also having possession of the documents of title to the goods. At first instance the term ‘document of title' is rather misleading, as in most cases the documents concerned have nothing to do with the title of the goods. However, the documents do give or evidence a person's right to the possession of goods, therefore, whoever has the document can ask for the goods to be delivered to him the statutory definition can be found in Factors Act 1889 s 1(4) and adopted by the Sale of Goods Act 1979 s 61(1).

It can be said that the practical terms, documents of title fall into two categories. The first category would fall under ‘acknowledgment', this may be a document signed by a person in physical possession of the goods and that he may be holding them on a particular person's behalf, awaiting delivery to that person. Typically, such an acknowledgment is called a warrant; this can be seen in the case of Sterns Ltd v Vickers Ltd. Secondly, an order may be regarded as a document of title, signed by the owned of goods or other person entitled to possession of them such as warehouseman or a carrier, who have been instructed to deliver the goods; such a document is usually regarded as a delivery order. Although these documents do not confer right of ownership, except for the bill of lading; they do however operate to protect an owner's title, because they give the holder the power to control the right of disposal of the goods which they represent.

The sixth exception is ‘motor vehicles subject to a hire purchase or conditional sale agreement' most of the Hire-Purchase Act 1964 had been replaced, but Part III still remains, ss27-29 of the Hire-Purchase Act 1964 provides an important exception to the nemo dat rule. This part of the Act is concerned to protect private purchasers acting in good faith who buy motor vehicles which have been let out on hire purchase without notice of the existence of the hire purchase agreement. It was confirmed in the case of Helby v Matthews, that a person who has taken goods on hire purchase is merely a hirer and not someone who has ‘bought or agreed' the goods, and so he cannot give good title to someone who buys the goods from him by virtue of s 25(1).

There are several important points from Part III which must be considered. Firstly, it only applies to ‘motor vehicles' by virtue of s 29(1). The word ‘private purchaser' specifically means someone who is not a ‘trade or finance purchaser' as specified in s 29(2). Therefore, all motor dealers and finance companies, but not other forms of business purchasers, this can be seen in Ge Capital Bank Ltd v Rushton.

However, an implication in the act would be the fact that only the first private purchaser from the hirer is protected. Thus, if the debtor sells the car to someone else who has notice of the hire purchase agreement, however, he will not get good title and neither will the next person who he sells it to. Nevertheless, if a vehicle which is on hire purchase is deposited of to a trade or finance purchaser, the first private purchaser from that trade or finance purchaser is protected, under s 27(2)-(5). On the other hand, a private purchaser will not be protected under Part III if the ‘hire purchase transaction was entered in to illegally, as can be drawn upon from the case of Shogun Finance Ltd v Hudson, as the it was a case of mistaken identity the Finance did not lose their title to the vehicle.

The last exception would be the sale by buyer in possession which is also the main focus of this assignment, this exception is contrary to s 25(1) of the Sales of Goods Act 1979, which reproduces with only minor alterations s9 of the Factors Act. Section 25 provides that: ‘where a person having bought or signed 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…of the goods or documents of title, under any sale pledge or other disposition thereof, to any person receiving…in good faith and without notice of any lien or other right of the original seller… has the same effect as if the person making the delivery or transfer were a mercantile agent in possession of the goods…with the consent of the owner'.

For this exception however, the principle of Jerome v Bentley does not apply: although the fact that an owner has let another person have possession of his goods carries no implication or representation that that person has authority to sell them. The case of Lee v Butler is regarded as the leading case on this section as it embarked on an important step in the evolution of the hire purchase agreement. The key point in the Lee v Butler case the fact that this was a conditional sale agreement, under which the seller retained the property until the whole of the agreed price was paid. However, in a true hire-purchase agreement, the hirer only has several options, either to buy the goods by paying all the hire instalments, or to discontinue the hire agreement freely when ever wished. The House of Lords held in the test case of Helby v Matthews that a purposrted sale of the goods by the hirer under such a contract to a third person did not come within s 25(1), so an owner would be protected against unauthorised sales by the hirer.

There has been some criticism towards the wording of s 25 (1) as it has crucial implications. The words ‘bought or agreed to buy' were regarded misleading as if a person had bought goods he would have a good title to it. But in Newtons of Wembley Ltd v William, it illustrated that the draftsman of this section had truly remarkable foresight, and there is a role for the word ‘bought'. However, no prior case to the Newtons of Wembley Ltd v William, had considered the actual meaning of the words in the section; these words can not be given full effect without invoking s 2 of the Factors Act 1889. It appears that s 25(1) could not be successfully invoked unless the first buyer had access to a place of business and conducted second sale ‘in the ordinary course of business of a mercantile agent'.

The final point to make concerning s 25 (1) is in relation to its very last words ‘with the consent of the owner'. The beginning of the section is mainly refers to the ‘seller'. This would then suggest that the ‘owner' mentioned at the end is a different person from the seller, therefore it could be presumed ‘the true owner'. From this it would follow, that the a person who has purchased stolen goods would get a good title even against a true owner, from whom the goods where originally stolen from. Although not an impossible construction, this would be surprising, for none of the other exceptions too the nemo dat rule, apart from market overt which is now repealed, has ever been understood to allow title to be conferred through a thief.

The Department of Trade and Industry published a Consultation Document containing poposals for the reform of some of the exceptions to the nemo dat rule and to extend Part III of the Hire-Purchase Act 1964 to cover all goods on hire purchase and similar contracts. More critically it has proposed that any one who is in possession of the goods with the owner's consent should have power to confer a good title on an innocent purchaser; however it would be safe to state that this is very much unlikely to be achieved as it has been criticised by BJ Davenport.