The Law Commission recently published a paper on suggested proposals for changes to the Sale of Goods Act 1979 (SGA) and the Consumer Rights Act 2015 in relation to the law of the transfer of ownership in goods in respect of consumer contracts.
It has long been felt that the language used in the SGA, and the complicated rules on the passing of “property” in goods, essentially based on the language set out in the Sale of Goods Act 1893, is archaic and not fit for purpose in today’s consumer climate.
Whereas only a couple of decades ago, most transactions were carried out by consumers shopping in a store for an item which they then took away with them, the Office for National Statistics has information which reveals that online sales have increased from 19 per cent to 32 per cent since 2019.
We can likely attribute part of this increase to the artificial online economy created by COVID-19, though there is clearly a continuing trend towards online shopping. For goods sold online, ‘ownership’ is a complex issue under current sale of goods legislation.
There are three contractual scenarios in which ownership issues arise:
(i) contracts for goods which are identified and agreed on (goods physically bought from shops and taken away);
(ii) contracts for goods which are not identified and agreed upon (goods bought online where the item bought is taken from a stock of identical items); and
(iii) contracts for goods forming part of a bulk – (which this article does not deal with)
Under the SGA, and in the absence of any contractual provision to the contrary, ownership (“title”) to goods will pass to the buyer at the latest once; (a) the goods are in a “deliverable state”; (b) they are unconditionally and irrevocably appropriated to the contract; and (c) there is an implied or express assent to both those factors by the buyer.
Ignoring the first of the contractual scenarios above, for goods bought online, ordered for manufacture, or requiring some further action to be taken before delivery or collection – for example, an inscription on a ring – when does ownership actually pass?
This is especially of concern for a buyer in an insolvency situation. Having paid the purchase price, will the buyer be able to take the goods ordered, or will they merely have an unsecured claim in the insolvency of the seller, leaving them with the risk of a low or no dividend payment on the amount of their debt?
Of course, the buyer may have a claim under section 75 of the Consumer Credit Act 1974 if they made the payment by credit card for a sum of more than £100 and less than £30,000. For those who have paid with debit card this is an important point.
In the event of insolvency of a retailer, insolvency practitioners will be at pains (and indeed have a duty) to treat all unsecured creditors of the company equally, and to not diminish the assets of the company if the buyer has no legal right to take delivery of the assets. For the buyer in relation to the second contractual scenario above, the most difficult aspect of showing that they have ownership in the relevant asset is showing that the goods are in a deliverable condition, and that there has been an unconditional appropriation of the goods to the buyer’s contract.
This is problematic on two counts. First, there is no statutory definition of “unconditional appropriation”, such definition being determined, unhelpfully, in each case, by case law. Secondly, when are goods in a deliverable state?
Case law has held that a car, which needs the registration plates attached to it, was not in a “deliverable state” even though the buyer had paid the full amount of the purchase price. In this case, ownership in the car had not passed. In an insolvency situation, this would leave the buyer with an unsecured claim in the insolvency for the amount of the vehicle’s purchase price.
The Law Commission has proposed that the sale of goods laws be simplified and generally couched in up to date, plain English. There are two main proposals which will assist buyers:
For specific goods identified and agreed upon, for example, the purchase of a ring that needs inscribing, transfer of ownership should take place at the time the contract is entered into. There should be no requirement that the goods are in a “deliverable state”.
For goods that have not been identified and agreed upon, for example, where goods are to be manufactured to a specification, or for the purchase of online goods, a non-exhaustive list of circumstances has been proposed to identify goods to a particular contract so that ownership can pass as above. Examples of these are:
Goods having been altered to the buyers specifications
Goods have been labelled with the buyers name or set aside for that buyer in a way which is intended to be permanent
The goods are handed to a courier for delivery
From the insolvency practitioners’ point of view, will these proposals, if brought into force, create problems?
It may be more likely that the insolvency practitioner has to hand over goods which previously had not been identified and agreed upon because of the outdated rules on the goods being unconditionally and irrevocably appropriated to the contract, or the goods being in a “deliverable state”.
Will the proposals ultimately make it easier for buyers in an insolvency situation? If ownership passes once the contract is entered into, this will make it easier for a buyer to lay claim to specific assets at the company, rather than just having an unsecured claim. This probably applies more to the scenario where a ring is purchased but left with the seller for inscription, than any other scenario.
Ultimately, insolvency practitioners tend to be commercial and practical. To the extent that a buyer can be dealt with in a way that decreases the unsecured claims in the company, it may be in the creditors’ interests for a buyer to receive their goods, rather than the company being left with specifically manufactured goods with no resale value.
Although the reform of the sale of goods legislation is due for an overhaul to bring it into the 21st century, it remains to be seen whether the proposals will actually benefit buyers, or create problems for insolvency practitioners.
by Michelle Shean, a Partner in Restructuring and Insolvency at Fieldfisher specialising in non-contentious insolvency, business restructuring and turnaround