Tuesday, February 17, 2009

Nemo dat rule

In what ways does commercial law protect a bona fide purchaser of personal property? - Justin Santiago

In commercial transactions, balance has to be made between rights of a bona fide purchaser and the strict application of the nemo dat quod non habet rule – no one can give a better title than he himself possesses enshrined under common law and under statute - Sale of Goods Act 1979 S21(1). This is exemplified in Lord Denning’s judgement in the case of Butterworths v Kingsway North Finance - 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.

From the historical point of view, the law has leaned towards the owner. However more recently the priority is given to security of transactions and the innocent purchaser has been given slightly more protection. The reason for the alteration might be owed to the following two realities :-

Firstly, it is often the case that the owner voluntarily transfers possession to the fraudster and he is certainly able to assess the risks inherent in the transaction, eg the fraudster’s creditworthiness. The buyer, on the other hand, rarely has either the time or the ability to investigate the title to the goods as, unlike real property, there is no certain method of ascertaining such title.

Secondly, the owner is frequently insured against the loss of his goods and will be able to claim on his insurance policy.

There are several exceptions to the nemo dat rule

1. Estoppel

An estoppel, when successfully raised, prevents the true owner from claiming that the sale of goods was unauthorised. An estoppel arises when the true owner leads the innocent purchaser to believe that the unauthorised seller has the right to sell the goods. In such a case the owner of the goods is precluded (estopped) from denying the seller’s authority to sell : S21(1) of the Sale of Goods Act. In order to be successful in estoppel, the following points must be established:-

(i) The true owner intentionally or negligently represents that the seller has the owner's authority to sell the goods as his agent;
(ii) The innocent buyer acts in reliance on the representation; and
(iii) The innocent buyer buys the goods.

However the scope of estoppel has been narrowed :-

Moorgate Mercantile Co Ltd v Twitchings – for estoppel by negligence to take effect there must be a duty owed, carelessness in handing over possession of goods or documents of title is not enough. The significance of the case lies in the fact that the court treated the existence and the nature of the duty to take care in such circumstances as the same as those which arise in the ordinary law of negligence. In other words, negligence must be more than mere carelessness and amount to a disregard of the owner’s obligation towards a person setting up the defence. The bona fide purchaser must be able to show that the owner owed him a duty of care.

Mercantile Credit Co Ltd v Hamblin – there was no estoppel by negligence because although there was a duty of care there was no breach of that duty, additionally the proximate or real cause was the fraud of the dealer

Shaw v Metropolitan Police Commissioner the estoppel principal did not apply where there was only an agreement to sell.

Debs v Sibec Development Ltd suggested that, even though the owner’s statement may be an unequivocal representation of the seller’s authority to sell the goods, it will be insufficient unless it is made voluntarily.

2. Factors Act 1889

This exception applies where a mercantile agent is, with the consent of the owner, in possession of goods or documents of title to goods, any sale, pledge, or other disposition of the goods, made by him when acting in the ordinary course of business of a mercantile agent, shall, subject to the provisions of this act, be as valid as if he were expressly authorised by the owner of the goods to make the same, provided that the person taking under the disposition acts in good faith, and has not at the time of the disposition noticed that the person making the disposition has no authority to make the same.

In order to pass a good title to the innocent purchaser, the following must be established:

(i) The mercantile agent must be in possession of goods or of the documents of title to goods. A bill of lading is a document of title but not the registration documents for a motor vehicle. Furthermore, it is generally accepted that a person must be a mercantile agent at the date he receives the goods and it is insufficient that he subsequently becomes one, unless there is further consent to this possessing the goods at the date when he has become a mercantile agent.

(ii) The possession must be with the consent of the owner. Consent is presumed in the absence of evidence to the contrary, and withdrawal of the consent is not effective as against a third party who takes without knowledge of the withdrawal of consent and under a disposition which would have been valid if the consent had continued. At Common law, if I deliver my car to a motor dealer for sale, I entrust my car to him as a mercantile agent. Then I leave my car for the purpose of repair, then even though he is a mercantile agent I have not consented to his possession of the car in that capacity and the section will not apply to a wrongful disposition made by him. Consent obtained by fraud is nevertheless an effective consent with the meaning of this section.

(iii) The sale must be in the ordinary course of the mercantile agent’s business. As to this question, I think Buckley LJ has given the best explanation in Oppenheimer v. Attenborough & Son. It reads as follows: ‘acting in such a way as a mercantile agent acting in the ordinary course of business of a mercantile agent would act’; that is to say, within business hours, at a proper place of business, and in other respects in the ordinary way in which a mercantile agent would act, so that there is nothing to lead the buyer to suppose that anything wrong is being done, or to give him notice that the disposition is one which the mercantile agent had to authority to make.

(iv) The person taking under the disposition must act in good faith and without notice of the mercantile agent’s lack of authority. The onus of proof on these issues lies upon the buyer.

3. Voidable contract (S23)

Under this exception a voidable title that has not been avoided yet could be transferred to a buyer that did not know about the deficiency of the title. If a contract is voidable, but sold before it is avoided the 3rd party would have good title.

4. Seller in Possession (S24)

Basically, a seller who is possession of the goods that he sold, can sell them again to a 2nd buyer and that buyer can acquire a good title if he receives them in good faith and without notice of the first sale. To a great extent, this exception derives from the fact that it is difficult to establish ownership in respect of goods, and therefore possession of goods is to be taken as prima facie evidence of ownership. Here several aspects have to be considered before the exception applies.

Firstly, in relation to possession, it should be noted that this exception applies not only in the situation where the seller ‘continues’ in possession but also where he is ‘in possession’ at the time of the second disposition. In Worcester Works Finance Ltd v. Cooden Engineering Co Ltd, Lord Denning MR considered that this phrase referred to the situation where the seller did not have possession when he sold the goods but ‘they came into his possession afterwards’.

Secondly, as to the delivery or transfer of goods or documents of title, it is not the document itself or the issuing of such a document of title which confers rights of ownership; it is the transfer to a second buyer of a document of title which is already in the possession of the seller, and which he was not parted with under the first contract of sale, that defeats the claims of the first buyer. The second buyer will not acquire title unless there is a delivery of goods or transfer of documents of title. For the second buyer to acquire good title, the seller must deliver possession of the good or documents of title, merely contracting a sale is not sufficient to give title to the second buyer : Michael Gersno v Wilkinson.

Thirdly, when we turn to look at good faith and want of notice, this exception mostly resembles the above exceptions. Furthermore, this good faith and want of notice must exist at the date of delivery of the goods, or transfer of documents title, as well as at the date of the seller’s disposition. If the seller wrongfully resells the goods to an innocent purchaser but before the delivery of the goods to him that purchaser becomes aware of the previous sale, then he is subordinated to the rights of the original buyer and does not acquire title. His remedy is to rescind the contract of sale and/or claim damages for breach of the condition of title.

5. Buyer in Possession (S25)

This exception allows a buyer who has been allowed by the seller to take possession of the goods or documents of title before property has passed, and then resells. Provided that there is actual delivery, the new purchaser who takes in good faith and without notice will obtain a good title. In terms of detailed discussion on seller in possession, here I just would like to add little difference of buyer in possession. The goods must be with the buyer with consent from the seller, it does not matter if he acquired the goods by a criminal offence as long as the owner consented and does not matter if the owner revoked his consent later. Another requirement is that the buyer must obtain possession of the goods or the documents of title to the goods. Constructive possession is sufficient here if the first buyer requested the seller to deliver the goods directly to the 2nd buyer. Also, the nature of the possession does not matter even temporary would suffice : Marten v Whale. It also seems possible for delivery to take place in an undivided bulk, although it would seem to conflict with s16 which does not permit a transfer of property in an undivided bulk of goods except in the circumstances set out in s20 inserted by the 1995 Act.

6. Part 3 of the Hire Purchase Act 1964

A bona fide purchaser for value of a motor vehicle from a person in possession under a hire-purchase agreement or a conditional sale agreement obtains a good title. This protects purchasers of motor vehicles who buy cars from hirers of cars on hire-purchase terms.

The details of Part 3 are quite complex, but the most important points are as follows:

(i) In respect of motor vehicles, the seller must be someone who is hiring the vehicle under a hire-purchase agreement or buying it under a conditional sale agreement.
(ii) The sale must be to a private purchaser, who must not be a dealer (or a finance house) carrying on business in the motor trade. This is so even where the dealer acquires the car for his own private purposes : Stevenson v Beverly Benticle Ltd.
(iii) Only the first private purchaser from the hirer (or ‘debtor’, as he is termed in the Act) is protected.

The onus of proof is on the purchaser to prove that he bought the car in good faith : Barker v Bell and without notice, if he succeeds, the HP company might want to show that B1 was not a purchaser in good faith, so that no title can pass from the start, or it might want to claim that the car was not disposed by the hirer at all, but was, for example, stolen from him, or was disposed by someone else.

It is elementary learning to identify nemo dat quod non habet as the most important conveyancing principle in English commercial law, however, that the innocent purchaser who buys in good faith needs some protection, and so there are various exceptions to the nemo dat rule. The main difficulty with the legislative response is that on the one hand it is too extensive in terms of legal consequence whilst on the other it is too restrictive in its scope because the protection to the innocent buyer is somewhat piecemeal.

Some reforms have been suggested, such as the adoption of uniform treatment for all transactions whereby a security interest is reserved in relation to goods, and the introduction of a system of registration for non-possessory securities. The most fundamental proposal might be the creation of an ‘entrusting’ principle. That is, whenever an owner has entrusted his goods to another or acquiesced in their possession by that other (‘the possessor’) in a wide range of contractual situations, any sale of goods by the possessor in the ordinary course of business to an innocent buyer would confer a good title on the latter.

Reform in this area of law is found in the judgement of Devlin LJ in Ingram v Little Devlin LJ as he then was, suggested that it might be possible to apportion the loss which occurs when an innocent owner and an equally innocent bona fide purchaser are left to dispute over the title to goods after some dishonest middle party has quit the scene. However this was rejected by the Law Reform Committee on the bases where the goods pass through several hands.

Comparison between different legal systems

Although the nemo dat rule is firmly entrenched in English law, many people hold the opposite view and they believe that the bona fide purchaser should be equally protected or even prior to the owner. In fact, many European systems invert nemo dat and consider the dominant principle to be protection of the bona fide buyer of goods.

In France, the sale of a thing belonging to another is treated as being voidable, which may give rise to damages if the buyer is ignorant that the thing belonged to another. Nevertheless, the sale may be treated as valid if the buyer has dealt with someone he considered to be capable of selling and both parties were induced by a common and legitimate error into concluding the sale. Where the buyer sues for rescission and damages from the would-be seller, a judge may decide not to award damages if in his opinion the seller has acted in good faith. This may be contrasted with the situation prevailing in the United Kingdom which are remarkably complex and subject to many common law and statutory exceptions.

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