‘Nemo Dat quod non habet’

The ‘fundamental’ principle of nemo dat quod non habet is expressly incorporated in s.21(1), Sale of Goods Act 1979. In National Employers’ Mutual General Insurance Association Ltd v Jones, Lord Goff argued that the succeeding sections of the Act ‘…appear to be minor exceptions to that fundamental principle’ ([1990] 1 AC 24 at 60). Critically discuss.

There are instances where the seller was not in fact the owner nor authorised agent of the owner at the time of the sale so a dispute arises between the original owner of the goods who is seeking to recover them and the ultimate buyer who has paid good money for the goods. Whilst it is desirable to protect the interests of both the original owner and the consequent buyer, this is impossible. Some legal systems have decided that the primary interest is to protect the honest buyer who pays a fair price and has no ground for suspecting that the seller is not entitled to sell but the starting point in English Law is that the original owner will have better title to the goods. This essay aims to assess whether some exceptions defeat this general rule.

As Michael Bridge states in his article on ‘Transfer of title,’ the law starts from the policy of property protection expressed in the Latin nemo dat quod non habet which means that a transferor is able to transfer only such property interest as he himself has and is stated in section 21(1) of the Sale of Goods Act 1979. However, as Bridge goes on to state, upon this general rule, there has been a series of exceptions designed to create a pragmatic balance with the policy of commercial security.

As Lord Denning Bishopsgate Motor Finance Corporation Ltd v Transport Brakes Ltd [1949] stated that ‘in the development of our law, two principles have striven for mastery.  The first is 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 better title. The first principle has held sway for a long time, but it has been modified by the common law itself and by statute so to meet the needs of our times.’  

This quote is important since it establishes two important principles. On the one hand, the need to protect the proprietary right of the original owner since he had better title to the good than anyone else. On the other hand the need to protect commercial transactions because the buyer takes the goods in good faith for the value offered to him. Whilst English Law seems to state that the general rule is in line with the protection of the original buyer’s rights, the law has developed several exceptions to this rule.

Lord Goff in National Employers’ Mutual General Insurance Association Ltd v Jones [1990], stated that these sections enact what appear to be minor exceptions to that fundamental principle. I will proceed to discuss several exceptions to the general rule and then evaluate whether these are minor or major exceptions to the fundamental principle.

Estoppel can be used as an exception (or defence) which is found in the last part of s 21 SGA which states ‘…unless the owner of the goods is by his conduct precluded from denying the seller’s authority to sell.’ The owner will be estopped from denying that he has given another person authority to sell the goods. As Ashurst J stated in Lickbarrow v Mason: ‘wherever one of two innocent persons must suffer by acts of a third, he who has enabled such third person to occasion the loss must sustain it.’ So if one party has through his conduct done something which enabled the other to suffer loss then that party should sustain it too.

This was seen in the case of Eastern Distributors v Goldring [1957] where a car owner, who wished to raise money on his car without selling it, was estopped when he entered in a deceitful transaction with a car dealer under which the car was represented to a finance company as belonging to the dealer. Devlin J stated that this differs from what is sometimes called ‘equitable estoppel’ in this vital respect, that the effect of its application is to transfer a real title and not merely a metaphorical title by estoppel.’ This is a case where the estoppel exception applied and therefore shows that the exceptions are major, protecting the innocent third party.

However, in other cases, it has been very difficult to prove this estoppel exception. In order for estoppel to be established there must be a representation upon which the third party, innocent buyer, relies upon. In Central Newbury Car auctions v Unity Finance [1957], the claimants bought a car the registration book of which was still in the name of the previous owner, Ashley. Cullis agreed to take the car on HP and was allowed to take it away with the registration book. Days later, a man named Ashley, the same person as Cullis, sold the car to Mercury motors who then sold it to Unity Finance. Dispute arises between the claimants and the finance company. In this case, it was held that having the registration booklet does not prove legal ownership so there was no representation made by the claimants that the stranger was entitled to deal with the car as his own so they were not estopped from asserting their own title.

This case shows that the exceptions will not always apply to protect the innocent’ party’s commercial transaction. Instead, the original owner’s title was protected, giving effect to the fundamental principle.

In Shaw v Commissioner of Met Police [1987], a student entrusted a rogue calling himself Mr London with his car and had signed papers, which allowed him authority to sell the car, in return for a cheque which was later proven to be worthless. London delivered the car to the clamant and then disappeared. The police took possession of the car and both the claimant and the student claimed possession of it. The court of appeal held that the sale was not complete and therefore it was not a sale but an agreement to sell to which the estoppel exception does not apply.

Lord Lindley made it clear in Farquarson Bros v King that the mere fact that the defendants (innocent party) acted honestly will not confer on them a good title as against the claimants, the real owners of the goods. This shows the limitation of the estoppel exception so although the innocent party acts in good faith, this will not constitute better title to the goods over the owner’s title.

In Mercantile credit v Hamblin, the owner was persuaded by a car dealer to sign blank forms of a hire purchase agreement with the claimants. There was an agreement between the owner and the car dealer that he would report to her after finding out how much money could be raised on the car but in breach of this he went ahead with the agreement. The owner was not estopped by negligence to claim that the car still belonged to her therefore protecting the original owner’s right.

In Moorgate Mercantile v Twitchings [1977], Lord Fraser stated that the owner of property is entitled to be careless with it if he like and even extreme carelessness will not preclude him from recovering it. This shows the limitation on estoppel exception and in particular estoppel by negligence argument. In addition, Lord Wilberforce stated that the owner is not estopped from asserting his title by mere inaction or silence in contrast to some positive conduct or statement. It cannot influence a person to act to his detriment unless it acquires a positive content so that that person relies on it. In this case, the claimants failed to notify Hire Purchase Information, which allows you to check the registration of a car and whether it is hire purchase, that the car was on hire purchase when it was hired to McLorg who dishonestly sold it to the innocent party. However, there was no estoppel and no liability on the basis of negligence.

All these cases show that the estopped exception is quite hard to prove therefore standing in line with the fundamental principle. So the exceptions can be seen as minor since the law sought to protect the original owner’s rights against the innocent third party.

In addition to this exception there is the exception in s 2(1) of the Factors Act 1889, which is alluded from Section 21(2) of the SGA 1979. This is where a mercantile agent with the consent of the owner, in possession of the goods, acts in the ordinary course of business of a mercantile agent making it a valid transaction as if the owner of the goods made the same provided the third party takes in good faith.

This turns us to the law of agency so the agent will bind his principal which means the third party will get good title in the goods. The buyer must be in possession and act with the consent of the owner. He must be a mercantile agent acting in the course of ordinary business. This exception links so the s 25 SGA exception. A mercantile agent is defined in s 1(1) of the Factors Act 1889 as: ‘a mercantile agent having in the customary course of his business as such agent authority either to sell goods, or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods.’

Agent has to be acting qua mercantile agent: In Pearson v Rose & Young, owner of car was tricked in leaving quickly before the deal was completed so he left the registration booklet and key behind. The dealer then dishonestly sold the car. CoA held that the dealer had tricked owner to leave quickly – although MA had car with owner’s consent, he did not have registration booklet with his consent so this case fell outside FA 1889.

Buckley LJ stated in Oppenheimer v Attenborough that ‘in the ordinary course of business’ means acting in such a way that a mercantile agent would act, this includes during business ours, at a proper place of business and in other ways so as to not lead the buyer to suppose there is anything wrong.’

In National Employers v Jones, it was established that a thief cannot be a ‘seller’ who has given consent since this is unlawful possession. However, when he resold it to another who sold it to the innocent third party, the last transaction was protected. This shows the limitation on the general rule and how such an exception can be used.

In Lowther v Harris, Lowther engaged an agent to seek buyers for the stored articles at his antiques shop but was not authorised to sell anything without obtaining Lowther’s approval. On a particular visit, the agent obtained Lowther’s consent to remove one of the tapestries by falsely telling him that he had sold it for a specific price when he has not. He later sold it to Harris for a reduced price. It was held that the agent was entrusted with the tapestry as a mercantile agent with the consequence that Harris has obtained good title.

Section 23 of the SGA 1979 provides the exception, which is sale under voidable title. This section provides that ‘when the 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 a good title to the goods, provided he buys them in good faith and without notice of the seller’s defect of title.’

This applies where the seller, instead of having no title at all, has a title which can be avoided; it is initially valid but can be set aside later. Under such a contract, ownership passes to a subsequent buyer but will pass back if and when the original seller later avoids the contract, for instance, where the seller had obtained possession of the goods by fraud. Where an owner of goods has parted with them to a fraudulent buyer, they are entitled to set aside the contract and if the owner acts in time, can recover the goods. However, if the fraudulent person has sold the goods on to an innocent buyer, that innocent buyer will obtain a title which is better than that of the original owner.

On the one hand, s 23 shows the importance of protecting the innocent third party. When one buys in good faith without knowing that any fraud has taken place, they have better title to the goods than the original owner. Even though the sale has taken place under voidable title, the innocent third parties’ transaction is protected which shows that such an exception to the general rule is not minor as Lord Goff stated. In Lewis v Avery, it was held that once a chattel is transferred to an innocent third party before voidable contract is set, the original owner loses title.

Bridge argues that third parties dealing with the rogue will be unaware of the circumstances in which the rogue acquired possession of the chattel: it is not easy to see how they have been any more deceived by outward appearances than those third parties who claim that surrendering possession to a rogue raises an estoppel. This is an argument in favour of protecting property rights since both parties, A and C have been deceived and trying to assess who was deceived more is not feasible.

On the other hand, this exception allows the original owner to reclaim the goods if they are able to avoid the contract in time, which preserves his property right, proving that the fundamental principle is protected. This is shown in the case of Car & Universal Finance v Caldwell [1965] shows that as long as A has taken reasonable steps to avoid the contract, this will be sufficient. This case concerned an owner who sold his car to a rogue and received a worthless cheque in return. The next morning, the owner presented the cheque at the bank and discovered that it was worthless. He informed the police and the motoring organisations. The Court of Appeal held that it is possible to avoid the contract without either telling the fraudulent person or retaking possession of the goods. The sale had been effectively avoided on the grounds that it is sufficient to do all that can be done to set the transaction aside. The issue therefore is timing. Therefore this could stand in line with Lord Goff’s statement that the exception to the fundamental rule is minor.

Battersby in his article on ‘Reconsideration of property and title’ argues that “property” is the totality of the rights which in a sale will pass from the seller to the buyer, while “title” implies a legitimate claim to ownership which others will be unable to defeat. Therefore under the exceptions to the nemo dat rule, the buyer acquires a new title distinct from that belonging to the seller. However, Battersby argues that in a situation of A B and C, good title means merely that C will defeat the right of recession vested in A. So in essence, C is regarded to have acquired the same title that was vested in A.

The case of Caldwell is contrasted with Newtons of wembley v Williams [1965], which is in regards to the exception of ‘buyer in possession’ under s 25 of the SGA 1979. This is where the buyer has acquired possession of the goods and sells to a second buyer. It is similar to s 9 of the Factors Act 1889. 

Although the buyer’s voidable title would have been avoided, he would still be a buyer in possession within s 25. This was shown in Newtons of Wembley v Williams [1965], where the plaintiff agreed to sell a car to A on the basis that the property was not to pass until the whole purchase price had been paid or a cheque is presented. A cheque was issued by A who was given possession of the car but the cheque bounced. The plaintiff took immediate steps to avoid the contract and after doing so, A sold the car to B in a London street market who sold the car to the defendant. The court of Appeal held that although the plaintiff had avoided A’s title, A was still a buyer in possession of the car and B had obtained good title from A when he bought from him in good faith and had taken possession of the car. Importantly, the sale by A to B had taken place in the ordinary course of business of a mercantile agent. A was treated as a mercantile agent who had initially obtained possession of the car with consent of the plaintiff, consent which was by virtue of section 2 (2) of the Act of 1889 to be deemed to continue notwithstanding that it had been revoked by the plaintiffs’ rescission of their contract.

Section 9 Factors Act 1889 could not be invoked unless it be shown, not only that the person taking under the relevant disposition took in good faith and without notice of the original seller’s rights, but also that the disposition was made in the ordinary course of business of a mercantile agent.

B had bought the car from A in Warren Street in good faith and without notice of the plaintiffs’ rights, and in view of the established street market in Warren Street for cash sales of secondhand cars the sub-sale by A to B was made in the ordinary course of business of a mercantile agent.

This case shows the different decision reached by the Court of Appeal in a similar situation. Where both owners took reasonable steps to avoid the contract but in Caldwell, the original owner was able to avoid the contract even if the innocent third party bought in good faith. However, Newtons of Wembley shows that the sale had taken place in the ordinary course of business of a mercantile agent and B had obtained good title from the buyer in possession, giving him better title to the car. This shows that the exceptions to the general rule when applicable can vary the decision giving effect to the commercial transaction rather than protecting the original owner’s property right. This goes against Lord Goff’s statement that these exceptions are minor.

However, Battersby makes the same analogy in regards to property and title to s 25 and concludes that section 25 is limited just as much as s 23 is in that C can only obtain the rights originally vested in A and does not defeat those rights. So C is not regarded to have acquired a new title distinct from that originally vested in A.

The limitations upon the s 25 exception is seen in a number of cases. On the one hand we have a stand alone case, Lee v Butler where it was held that a buyer is not owner until he pays but as long as he is in possession with the consent of the owner then he can pass good title. Here, the claimant entered into a hire purchase agreement with buyer for furniture. The buyer was in possession of the goods and sold them to buyer 2 who bought in good faith, unaware of the claimant’s rights to the goods. This is where the s 9 exception succeeded.

However, the case of Helby v Mathews shows otherwise. This is where the owner leased the piano to the buyer who could return it without the obligation to purchase. However, the buyer pledged the piano to buyer 2 so the original owner claimed the piano from buyer 2, who argued that under s 9 he has obtained possession through the agreement to buy the piano. This was rejected because there was no agreement to sell but offer and since there was no obligation to buy then there was no agreement to buy.

The reverse of this section is s 24, which presents the seller in possession exception similar to that in s 8 of the Factors Act 1889.

Another exception is hire purchase under the Hire Purchase Act 1964, s 27. Where a purchaser obtains title where they acquire a motor vehicle for value and without notice from someone who is in possession under a hire purchase or conditional sale agreement. Section 27(2) provides that the third party must buy in good faith without notice of the relevant agreement.

A common example is where someone purchases a car on hire purchase terms and then sells it on second hand market for cash before the HP agreement is completed. Such transactions will not be protected by s 25 because someone acquiring goods on HP is not a buyer nor is he protected by the Factors Act 1889 because the seller is not a MA. This was seen in Shogun Finance v Hudson where a HP agreement whereby a fraudster got a car from a finance company by pretending to be someone else was annulled and the third party could not get good title from him therefore it was not within s 27. This shows that the fundamental principle was preserved again.

In conclusion it can be said that these two principles, the need to protect property rights and the need to secure commercial transactions are clearly in conflict. Whilst the law presents us with the starting point of preserving property rights, the exceptions can be seen as an effective compromise to a rather harsh rule which would leave every innocent party who buys in good faith and for the value offered to them with no remedy. It will undermine commercial transactions and reduce certainty of the contract, and in essence the law, for those innocent parties. Therefore it can be concluded that the exceptions under the SGA and the Factors Act are in fact major exceptions to the general rule, even where some do not work for the innocent party’s advantage.

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