Transfer of ownership of goods – modernising the rules

The Law Commission has recently launched a consultation on a draft Bill to reform the rules that apply to the transfer of ownership of goods. In this post we explain the proposed reforms and the issues raised in the consultation paper.

In our July 2016 report, Consumer Prepayments on Retailer Insolvency, the Law Commission made a range of recommendations to enhance the protection of consumers who had paid retailers in advance for goods but had not received the goods at the point of the retailer’s insolvency. One of our recommendations was to reform the rules governing transfer of ownership. The Government asked us to draft legislation to implement this recommendation, leading to the draft Bill on which we are now consulting.

The current transfer of ownership rules are contained in the Sale of Goods Act 1979, and have remained largely unamended since 1893. These rules distinguish between “specific goods” and “unascertained goods”. Specific goods are goods which are identified and agreed upon at the time the contract of sale is made. Under the Act, the default position is that ownership of specific goods transfers when the contract is made, provided that the goods are in a “deliverable state”. What does “deliverable state” mean? The Act says that goods are in a deliverable state when the buyer is “bound to take delivery of them”. This can give rise to difficult questions of contractual construction which an insolvency practitioner (who, in practice, is the person who determines who owns what on an insolvency) may not be well placed to answer. For example, if a consumer selects a diamond ring in a shop and leaves the ring with the retailer to be inscribed, but the retailer goes insolvent before the inscription is completed, is the ring in a deliverable state?  Is the consumer bound to take delivery only when the inscription is completed, or is the inscription the subject of a separate contract to the contract of sale?  Insolvency practitioners might give different answers to these questions, creating uncertainty for consumers about their ownership of specific goods in insolvency situations.

Unascertained goods are goods which are not identified and agreed upon when the contract is made. Under the Act, the default position is that ownership of unascertained goods transfers when the goods are in a deliverable state and are “unconditionally appropriated” to the contract. What does “unconditionally appropriated” mean? Again, the answer is not entirely clear. The term is not defined in the Act. It is generally thought that unconditional appropriation means delivery, but in some cases the mere setting aside of goods has been found sufficient (compare Carlos Federspiel (1957) Lloyd’s Rep 240 with Aldridge v Johnson (1857) 119 ER 1476). Much like the “deliverable state” requirement, the requirement that unascertained goods must be “unconditionally appropriated” to the contract creates uncertainty for consumers about whether they can claim goods in an insolvency situation. 

In the consultation leading to the July 2016 report, the Law Commission was told that the current rules are difficult for consumers to understand and can lead to results which are inconsistent with consumers’ reasonable expectations of when they will acquire ownership of goods. Many aspects of the contractual relationship between consumers and retailers are now set out in the Consumer Rights Act 2015, but the rules on transfer of ownership conspicuously are not. We think consumers deserve a clear, modern statement in the Consumer Rights Act 2015 about when they will acquire ownership of goods.  With consumers increasingly paying for goods in advance online (online shopping currently accounts for nearly a third of all retail sales) and with retailer insolvencies at a five year high, the need for a clear set of transfer of ownership rules for consumers might be thought especially pressing.

The Law Commission’s draft Consumer Rights (Transfer of Ownership under Sales Contracts) Bill would insert transfer of ownership rules into the Consumer Rights Act 2015. These rules would apply to “sales contracts”, defined in the Act as contracts where the trader agrees to transfer ownership of goods to the consumer in exchange for a price. To the extent that the transfer of ownership rules in the Sale of Goods Act 1979 would also apply to these contracts, those provisions are disapplied by the draft Bill.

Like the Sale of Goods Act 1979, the draft Bill distinguishes between two types of goods: “goods which are identified and agreed on when the contract is made” and “goods which are not identified and agreed on when the contract is made”.  For goods of the former type, the draft Bill provides that the sales contract is to be treated as including a term that “ownership of the goods transfers to the consumer when the contract is made”. There is no requirement that the goods must be in a “deliverable state”. Thus, under the draft Bill, the consumer who chooses a diamond ring in a shop would obtain ownership of the ring at the moment the contract is made, even if the ring is left with the retailer to be inscribed.  This rule provides clarity for consumers about ownership of goods identified at the time of contracting, and can be easily applied by an insolvency practitioner.

For goods not identified when the contract is made, the draft Bill provides that the contract is to be treated as including a term that ownership transfers when the “goods that are to be used to fulfil the contract are identified by the trader”. There is no requirement that the goods must be “unconditionally appropriated” to the contract. The draft Bill sets out a non-exhaustive list of events and circumstances of identification, the occurrence of any of which will cause ownership to transfer to the consumer. These include: labelling the goods with the consumer’s name; setting aside the goods for the consumer; altering the goods to a specification agreed between the trader and the consumer; the trader telling the consumer that goods bearing a unique identifier will be used to fulfil the contract; the consumer examining the goods and agreeing that they are to be used to fulfil the contract; delivery of the goods to a carrier for delivery to the consumer; and delivery of the goods to the consumer. This list provides clarity for consumers as to when they will acquire ownership of goods they have contracted to buy and enables insolvency practitioners more easily to determine whether a transfer of ownership has occurred between the entry into the contract and the retailer’s insolvency.

The rules in the draft Bill would be mandatory, in contrast to those in the Sale of Goods Act 1979 which can be displaced by a contrary intention of the parties. Where a term of a sales contract provides that ownership is to transfer at a later time than under the draft Bill, the term would be to that extent of no effect. This means that a sales contract could not impose conditions upon the transfer of ownership in addition to those in the draft Bill: for example, that the consumer has paid for the goods. Section 39 of the Sale of Goods Act 1979 would, however, continue to apply, so that a trader would be able to exercise a lien over the goods in the event of non-payment by the consumer.

The draft Bill would not alter the position on the passing of risk, which is governed by separate rules in the Consumer Rights Act 2015 which would continue to apply. Under section 29 of the Act, risk passes only when the goods come into the physical possession of the consumer or a carrier commissioned by the consumer to deliver the goods. This is in contrast to the Sale of Goods Act 1979, where, unless otherwise agreed by the parties, risk passes upon the transfer of ownership.   

In the consultation paper, we ask a number of questions about the draft Bill.

One set of questions asks about whether the rules are drafted sufficiently clearly and comprehensively. We ask whether there are other events and circumstances which should result in a transfer of ownership to the consumer, whether the rules should apply beyond sales contracts (for example, to conditional sales contracts and contracts for the transfer of goods) and whether rules should also be drafted for goods forming part of a bulk.

A second set of questions asks about how our proposed rules would interact with the proprietary claims of other creditors on an insolvency: for example, third party warehouses asserting a lien over the goods as security for their unpaid fees, and suppliers claiming that the goods are subject to retention of title.  

A third set of questions asks about the formation of the sales contract. The transfer of ownership is of course reliant on a contract being in place between the consumer and the trader.  However, traders often state in their terms and conditions that they will not accept the consumer’s offer to purchase the goods (and so the contract will not form) until the goods are “dispatched” to the consumer. This may have significant implications for the transfer of ownership, for if the contract does not form until dispatch, then ownership cannot transfer, even if one of the events and circumstances in the draft Bill has occurred. We ask questions about these terms and conditions, including why they are used, by whom, and their potential impact.

The Law Commission’s consultation is open until 31 October 2020.

Responses can be made by completing an online form or by email to ownership@lawcommission.gov.uk.

More information, including the draft Bill, consultation paper and a summary, is available at https://www.lawcom.gov.uk/project/consumer-sales-contracts-transfer-of-ownership/.      

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How to cite this blog post (Harvard style) 

Barry, M, Green, S. (2020). Transfer of ownership of goods – modernising the rules. Available at: https://www.law.ox.ac.uk/research-and-subject-groups/property-law/blog/2020/08/transfer-ownership-goods-modernising-rules (Accessed [date]).