Commercial Law, the Sale of Goods Act 1979 - Assignment Example

1) (a) The legal rules for determining ownership of goods in sale of goods contracts are covered by the common law and statute. The Sale of Goods Act 1979 (SGA) sets out legal presumptions regarding ownership, however these presumptions are subject to the freedom of contract principle1. Under the SGA, ownership depends on whether the goods are ascertained or unascertained goods2. If there is an express provision that the property was to pass to the buyer at a particular stage, that provision could not, in the case of a contract for the sale of unascertained goods, come into effect until those goods were ascertained under section 16 of the Sale of Goods Act 1979 (SGA). Section 18 further provides also that where goods are in bulk and not ascertained they cannot pass to the buyer. The time for determining whether goods are specific or unascertained goods is that at which the contract is made3. If the contract is for goods which are “identified and agreed upon” at the time the contract is made, then the SGA it will be a contract for ascertained specific goods. In the current scenario, whilst the quantity of goods ordered by Lacey is dependant on the customer orders, the actual goods are clearly identifiable and the agreement between Lacey and Micro-Maker is therefore most likely to constitute a good for ascertained goods. Additionally, the general rule set out under section 17 of the SGA provides that property in goods pass when the parties intend it to pass, thereby highlighting the freedom of contract principle4. With regard to the current scenario it is unclear whether express provisions have been contractually agreed regarding ownership. Section 20A of the SGA provides for the buyer to obtain an undivided share of goods in unascertained goods from an identified bulk. Section 20A applies to the goods when the buyer pays for the goods, which in the current case is 60 day credit period. Accordingly, the passing of ownership and risk will be determined by reference to what the parties have agreed or alternatively by reference to ss.16-19 of the SGA. With reference to section 17 of the SGA, it has two parts. Part 1 states that where there is a contract for the sale of specific or unascertained goods; the title to property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. For the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. This is highlighted by the dictum of Diplock LJ in the case of RV Ward Ltd v Bignall5, where it was held “very little is needed to give rise to the inference that property in specific goods is to pass only on delivery or payment6”. If no intention is expressed, then section 18 is applicable, which provides that where 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 delivery or both, be postponed. Alternatively, section 19(1) of the SGA expressly provides that: “where there is a contract for the sale of specific goods, or where the goods are subsequently appropriated to the contract, the seller may, by the terms of the contract or appropriation, reserve the right of disposal of the good until certain conditions are fulfilled; and in such a case notwithstanding the delivery of the goods to the buyer… the property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled”. Once the goods have become ascertained in this case at point of delivery, then under section 18 of the SGA, the property will not pass (subject to contrary intention in the contract) until goods are unconditionally appropriated to the contract by one party with the assent of the other. Furthermore, as highlighted in the case of Ward v Bignall discussed above7, there is a presumption that ownership passes to the buyer on delivery. Additionally, in the case of Sainsbury v Street8 it was asserted that “in order to pinpoint the exact time that property passes the contract has to be classified. The contract can be one of two types, being either (i) for the sale of specific goods, or (ii) for the sale of unascertained goods”9. This decision is pre-SGA and is mirrored in the provisions of SGA regarding the distinction between unascertained and ascertained goods. Specific goods are those which are identified and agreed at the time of the contract being entered into for example, the sale of a car as highlighted in the case of Kursell v Timber Operators and Contractors Limited10. The current scenario points towards a contract for ascertained goods and therefore it is likely that ownership of the property will pass on delivery based on the SGA provisions and established case law. 1b) With regard to protection against the risk of non-payment, the greatest risk to Micro Maker is if the property passes in the goods to Lacey upon delivery. As such, it would be prudent for Micro-Maker to include a retention of title clause in its agreement with Lacey in order to ensure that it can recover its goods in the event of non-payment11. Micro-Maker should also try and agree a clause whereby the risk passes to Lacey upon delivery12. This right to reservation of title has through practice been termed the “Romalpa” clause13, due to the case of Aluminium Industries v Romalpa Aluminium14, which set out guidelines regarding enforceability of reservation of title clauses. A liberal approach was adopted in interpretation of the reservation of title clause in the Romalpa decision and in particular, the court enabled the seller enforcement of the following provisions in a reservation of title clause: 1) The right to the original, unused, goods themselves; 2) The right to manufactured goods from the original items; and 3) The right to the proceeds of any resold manufactured or original goods to third parties15. This would be the best course of action for Micro-Makers. It is further submitted that any such reservation of title clause should require Lacey to store the microwaves separately from other products and include a right of entry for Micro-Maker to come and recover its goods in the event of persistent non-payment by Lacey in breach of contract16. 2 a) With regard to issues of risk in the event that goods are damaged in a fire, under Section 20(1) of the Sale of Goods Act 1979, unless the contrary is agreed, the goods will remain at the seller’s risk until the property in them passes to the buyer17. Therefore, would be well advised to include a clause that the property will remain at Lacey’s risk from the moment of delivery or else ensure covered by its own insurance for any loss or damage caused after delivery by accident, act of god or third party18. If the contract is silent as to the risk then apart from the two exceptions specified in sub sections (2) and (3) of section 20 of the SGA; the basic approach adopted is to tie the passing of property is to tie the passing of risk to the passing of property under the provisions in ss.16-19. However, this approach appears flawed as the passing of property is significant for various purposes including the seller’s right to maintain an action for the risk and the seller’s right to maintain an action for the price under section 49 of the SGA. Nevertheless, the rules on passing of risk are ultimately covered by the freedom of contract principles which allows parties to agree when they want the risk and property to pass19. Section 20 of the SGA relates to when risk passes with the property and risk passes with ownership unless otherwise agreed. This was further highlighted by the decision in the case of Phillip Head & Sons Ltd v Showfronts Ltd20. Alternatively, where the delivery has been delayed due to fault of either the buyer or seller the goods will remain at the risk of the party at fault as regards any loss which might not have occurred but for the fault. If we apply this to the current scenario, based on the general rule that the risk passes on delivery, theoretically Lacey will be liable for the damage to the goods whilst in their shop. However, the situation is slightly ambiguous in the event that Micro-Maker inserts a reservation of title clause. In this case, Micro-Maker would have to insert a clause that notwithstanding reservation of title until payment, the risk passes upon delivery to ensure that Lacey bears the risk of any damage to the goods when stored on its premises. Alternatively, if goods are damaged after payment for the goods then the buyer is usually liable21. Where there is a possibility and a distinct risk of loss or damage and steps were not taken to protect this, then negligence issues will be involved and risk will remain with the party at fault22. Moreover, if reliance is placed on section 20 of the SGA that risk in the goods passes on delivery and not payment, the buyer will be liable from point of delivery. If we apply this to the current scenario, as soon as the goods are delivered, the risk remains with Lacey who will be liable. However, this is subject to freedom of contract principles. b) If the goods are stolen whilst the van was in transit then on a strict application of the statute without reference to anything to the contrary agreed in the contract, then as the goods are not yet delivered, the risk remains with Seller (as under section 20 property has not passed). On this basis, unless it is clearly stated in the contract that risk is to pass as soon as the goods are despatched, Micro-Maker will bear the loss in the case in the event the goods are stolen in transit. Question 3) Section 13 of the SGA also provides that goods must comply with their contractual description however this is qualified by section 15A of the SGA which asserts that if the breach is so slight then it will be a breach of warranty and not a breach of condition. Moreover, if goods do not comply with the contract description, Lacey would have the right to return the goods23. Question 4) with regard to the goods being scratched, the SGA implies certain conditions as to quality of goods provided under a contract for the sale of goods. In particular, Section 14(2) expressly provides that “where the seller sells goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality”. Furthermore, section 14(2A) of the SGA provides that “goods are of satisfactory quality if they meet the standards that a reasonable person would regard as satisfactory, taking account of any description of the goods”. Moreover, the SGA provides that goods must be fit for purpose and merchantability. The test is objective and if the microwaves fail to satisfy these implied conditions, Lacey will have the right to return the goods. 5) With regard to issues of non-payment, under Section 20(1) of the Sale of Goods Act 1979, unless the contrary is agreed, the goods will remain at the seller’s risk until the property in them passes to the buyer. Therefore, Micro-Maker would be well advised to include a clause that the property will remain at Lacey’s risk from the moment of delivery or else ensure covered by its own insurance for any loss or damage caused after delivery b accident, act of god or third party. Additionally, the reservation of title clause should ensure that the goods are stored separately and that Micro Maker has a right to enter the premises to recover its goods in the event of insolvency. Moreover, the contract itself should provide for the right to terminate the contract immediately on the event of insolvency24. The main issue for Micro-Maker would be to protect their position and ensure payment and whilst the Romalpa decision enabled the seller to retrace the proceeds of the sale of the goods from the buyer on the facts of that particular case, the courts have since been reluctant to allow sellers to recover proceeds of the sale, even if as in the present case the clause specifically asserts that the buyer is to act as fiduciary agent for the seller25. After the decision in Clough Mill Ltd v Geoffrey Martin26, the rule that a simple reservation of title clause reserving the right to the original and unused goods until they are paid for will be effective was reiterated. However, it was further held that the clause created a charge in favour of the sellers in respect of newly created goods. However, it is important to mention that if this reasoning is applied, in a corporate context, the charge must be registered otherwise it will be void against a liquidator for non-registration27. Since this decision, courts have evolved an approach in favour of the registered charge in these circumstances28. Accordingly, it is recommended that the reservation of title clause be registered as a charge by Micro-Maker to be effective particularly in the event of third party involvement in potential insolvency. Whilst a simple reservation of title clause over unused goods may work, section 25 of the SGA creates the effect that the onward sale to a bona fide purchaser may negate the title as against a subsequent purchaser29. The recent development in this area has again highlighted the problem of reservation of title clauses regarding proceeds of sale of property supplied under contract, the construction of which is particularly important on liquidation30. A liquidator must determine the company’s title to property in its possession31. Property which is in the possession of the company, but supplied under valid retention of title clause will have to be returned to the supplier however property held by a company on trust for third parties will not form part of the company’s assets available to pay creditors32. For example, in the case of E Pfeiffer v Arbuthnot33, it was held that where a buyer re-sells goods, then the proceeds of sale of the goods shall be held on trust for the seller and as such, this constitutes a registrable charge, which may be void in the event of non-registration. This was further affirmed in the case of Compaq Computer v Abercorn34. In applying this to the current situation, the clause will be valid against delivered microwaves in Lacey’s possession at the warehouse. As such, will have Micro-Maker will have priority over this consignment of microwaves in the liquidation35. With regard to the proceeds of the sale of microwave (in the event that Micro-Maker has not yet been paid by Lacey), Micro-Maker will have rights to the proceeds under a registrable charge only if registered. Even if this charge is registered, the claim in respect of the proceeds will not be as a priority creditor36. Alternatively, if Micro-Maker utilised the words “fiduciary” in the contract with Lacey, this imports a fiduciary relationship and as such, it is arguable that the proceeds will in fact be held under trust by virtue of the fiduciary relationship37. Under a fiduciary relationship there is no requirement to register the interest however Micro-Maker’s claim to the proceeds under the trust principle in the event of insolvency would still not grant them priority in the liquidation38. Nevertheless, a liquidator would have a duty to consider the interests of any trustees under such a trust carefully in administration.39 Question 6) a) If Lacey becomes insolvent, then provided the original contract between Lacey and Micro Maker included a clause that the agreement and all obligations would be terminated in the event of insolvency, Micro-Maker will not have to deliver the demonstration models to the warehouse40. b) With regard to the models already despatched and in transit, if they included a reservation of title clause, they will be able to recover these. Additionally, if the contract included a Romalpa clause and right of entry to recover the property, Micro-Maker will be able to recover the models from Lacey’s stores as property in the goods has not yet passed41. BIBLIOGRAPHY Anderson and Warner., (2006). A-Z Guide to Boilerplate and Commercial Clauses. 2nd Edition Tottel Publishing. P. S Atiyah (2005). Sale of Goods.11th Edition Longman. Blackstones Statutes on Contract, Tort and Restitution Chitty on Contracts (2007). 29th Edition Sweet & Maxwell. Davies (2005). Romalpa thirty years on – still an enigma? Hertfordshire Law Journal 4. Dignam (2004). Company Law and Human Rights. Tottel Publishing. John Macleod (2006). Consumer Sales Law. 2nd Edition Routledge Cavendish. Linda Mulcahy & John Tillotson (2004). Contract Law in Perspective. Routledge Cavendish. Hubert Picarda (2006). The Law Relating to Receivers, Managers and Administrators. 4th Edition. Tottel Publishing. Jill Poole (2006). Contract law. 8th Edition Oxford University Press. G H. Treitel (2007). The Law of Contract. 12th Revised Edition Sweet & Maxwell. Sale of Goods Act 1979 Read More