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Hong Kong Law Reform Commission |
9.1 In the preceding chapters, we discussed the terms to be implied in
contracts for the supply of goods, the remedies for breaches of those terms and
the exclusion of liability for such breaches. We discussed these matters in
respect of various types of contracts for the supply of goods so as to bring
them in line with contracts for the sale of goods.
9.2 Cap 26 also
provides for a number of other matters relating to contracts for the sale of
goods which are not necessarily relevant to other types of contracts for the
supply of goods. In this chapter, we discuss various issues concerning
Cap 26, including sale of goods forming part of a bulk, right of partial
rejection, the market overt rule, remedies for delivery of wrong quantity,
acceptance of goods and the right to a reasonable opportunity of comparing the
bulk with the sample. The relevant provisions in other jurisdictions on these
matters prompt the present discussion. We first discuss the existing provisions
in Cap 26 together with their associated problems and then the experiences
of other jurisdictions. After discussing the available options and the
responses to the Consultation Paper, we present our
recommendations.
9.3 The recommendations we make in this chapter are as
follows:
(a) concerning sale of goods forming part of a bulk – Recommendation 24;
(b) providing for rights of partial rejection - Recommendation 25;
(c) abolishing the market overt rule - Recommendation 26;
(d) restricting rights of rejection on delivery of wrong quantity –Recommendation 27; and
(e) clarifying that asking for repairs not amount to acceptance of goods - Recommendation 28.
We
also observe that the definitions of "goods" and "specific goods" in Cap 26
should not be extended until the implications of the extension in England become
clearer, and that consideration should be given to consolidating consumer
protection provisions within a single statute.
9.4 Section 18 of Cap 26 provides:
"Where there is a contract for the sale of unascertained goods no property in the goods is transferred to the buyer unless and until the goods are ascertained."
9.5 The
effect of section 18 is that a buyer of goods forming part of bulk cargoes or
bulk storage does not obtain property to the goods until the goods are
ascertained. The effect will be the same even if the buyer has paid the seller
already. In the case of the insolvency of the seller, the buyer will become
just an unsecured creditor while the goods and price paid by the buyer will pass
to the office-holder in insolvency.
9.6 The effect of section 18 can be
illustrated by a number of
cases.[393] In Re
Wait,[394] 500 tons of wheat
from a cargo of 1000 tons, to be shipped from elsewhere, were sold and paid for.
Before ascertaining the 500 tons, the seller became insolvent. It was held that
because of section 16 of the 1979 Act (equivalent to section 18 of Cap 26),
property in the 500 tons could not pass to the buyer before the goods were
ascertained.
9.7 In Re London Wine Co (Shippers)
Ltd,[395] specified
quantities of wine were sold to various buyers but remained stored with the
seller. There was no appropriation of the goods. Each buyer received a
document certifying him as the beneficial owner of the goods and was charged
storage and insurance. The seller became insolvent subsequently and it was held
that property in the goods did not pass in any of the three types of
transactions[396] before the goods
were ascertained. Since there was no certainty of the subject matter, there was
no trust. The certifying document and payment did not give rise to a
proprietary interest. These cases show that a buyer of goods forming part of
bulk cargoes or bulk storage will not be able to obtain the goods on the
seller's insolvency. This will be the same even though he has paid for the
goods already in return for what he perceived to be a document of title such as
a bill of lading. The buyer has paid for the goods, but yet loses the goods and
becomes an unsecured creditor along with all others. This is unsatisfactory and
unfair.
9.8 Other unsatisfactory effects of section 18 include the
fact that the section may also prevent property from passing to a buyer despite
physical delivery of the goods to
him.[397]
9.9 On the one
hand, section 18 prevents property from passing; on the other hand, it does not
prevent risk from passing to buyers. According to section 22 of Cap 26, the
general rule is that risk passes with property, unless otherwise
agreed.[398] For example, in
Sterns Ltd v Vickers
Ltd,[399] the Court of
Appeal held that, whether the property had passed or not, upon acceptance of the
delivery warrant, risk passed to the buyer. In international sales, the
presumption in section 22 is usually rebutted. In a "free on board" (FOB)
contract, risk passes to the buyer on
shipment[400] while in a "cost
insurance freight" (CIF) contract, risk passes to the buyer on, or as from, the
time of shipment.[401] In other
words, a buyer of goods out of a bulk may still have to bear the loss even if
the goods are damaged or lost during transit. This means that on the insolvency
of a seller, a buyer (B) of goods out of a bulk may lose his specified quantity
of goods to an office-holder in insolvency even though he has paid for the goods
already.
9.10 Furthermore, B does not have the title or interest to sue
in tort for the damage to the
goods,[402] even though he is the
one to bear the loss of the goods. It is because a buyer cannot obtain legal
ownership in, or possessory title to, the goods until the goods are ascertained.
It is highly unsatisfactory and unfair that a statutory provision should lead to
such consequences.
9.11 In commercial practice, sellers and buyers of
goods out of a bulk usually want the property in the goods to pass when payment
is made in return for documents such as bills of lading. Section 18 does not
allow the parties to do so and so defies commercial expectation and amounts to
an obstacle to freedom of contract. Tom Burns has said in relation to section
16 of the 1979 Act that it was "a mandatory rule which took no account of the
intentions or expectations of the
parties".[403] John Whisson
has also said, "[t]he prohibition contained in s16 is indeed onerous and
restrictive in respect of goods forming part of a
bulk".[404]
9.12 It is
useful to point out here that section 18 brought about another problem which has
been solved. Because of section 2 of the repealed Bills of Lading Ordinance
(Cap 45),[405] a person to whom
goods were to be delivered under a contract for the carriage of goods by sea
could not sue the carrier under the bill of lading for loss or damage to the
goods before the property in the goods passed. This was particularly serious
for sales of parts of bulk cargoes since section 18 of Cap 26 prevents the
property from passing before the parts sold had been ascertained. Consequently,
the buyer could not sue the carrier for the loss or damage even though he had
paid for the goods and received a bill of
lading.[406]
9.13 In 1993,
the Bills of Lading and Analogous Shipping Documents Ordinance (Cap
440)[407] resolved this problem by
providing that any lawful holder of a bill of lading has a right to sue the
carrier. It stops making the passing of property in the goods as a prerequisite
to sue a carrier under a contract of carriage. However, it only deals with one
of the many problems brought about by section 18 and other problems remain to be
resolved.
9.14 Before recommending ways to tackle the problems brought about by
section 18 of Cap 26, it is helpful to examine the experiences in other
jurisdictions. There are three categories:
(a) those with positions similar to Hong Kong (France and Italy);
(b) those requiring delivery to transfer property, but which allow substitutes for actual delivery (Germany and the Netherlands); and
(c) those with provisions for the passing of property in goods forming part of an identified bulk whereby a buyer becomes an owner in common (the United States and the United Kingdom).
9.15 According
to the civil code in France, property in goods sold by weight, number or
measure, does not pass until the goods are
"individualised".[408] If the
goods sold are specific goods, property passes once the contract is
made.[409] In Italy, property
passes according to the parties' agreement in general, but where the goods sold
are generic, property passes only "on identification by agreement between the
parties or in the manner established by
them".[410]
9.16 In
Germany, the general rule is that delivery is required for property to
pass.[411] There are three
exceptions. The first is when the buyer is in possession of the
goods.[412] Secondly, where the
seller is in possession, there may be substituted for delivery an agreed legal
relationship between the parties, and the buyer will then obtain indirect
possession.[413] Thirdly, where a
third party is in possession, there may be substituted for delivery the seller's
waiver to the buyer of his claim for delivery of the
goods.[414]
9.17 Delivery
is also required in general for property to pass in the
Netherlands.[415] However,
physical delivery is not required in certain situations, which are similar to
those in
Germany.[416]
9.18 In the
United States, where goods sold are out of an identified bulk, a buyer of a
specified quantity out of the bulk may acquire property in the goods as an owner
in common. Section 2-105 (4) of the Uniform Commercial Code provides:
"An undivided share in an identified bulk of fungible goods is sufficiently identified to be sold although the quantity of the bulk is not determined. Any agreed proportion of such a bulk or any quantity thereof agreed upon by number, weight or other measure may to the extent of the seller's interest in the bulk be sold to the buyer who then becomes an owner in common."
9.19 In
England, new sections 20A and B were added to the 1979 Act by the Sale of Goods
(Amendment) Act 1995 which was prompted by the joint report of the English and
Scottish Law Commissions.[417]
According to section 20A(1) -
(2),[418] a buyer, having paid for
some or all of a specified quantity of goods forming part of an identified bulk,
becomes an owner in common of the bulk despite section 16 (equivalent to
section 18 of Cap 26). There are three conditions for this section to
apply: (a) a specified quantity; (b) an identified bulk; and (c) a
pre-paying buyer.
9.20 When the three conditions are satisfied, property
in an undivided share passes to the buyer unless the parties agree otherwise. A
buyer's share in the bulk as a co-owner is such share as the quantity bought and
paid for by the buyer bears to the quantity in the bulk (section 20A(3)). The
shares of a buyer fluctuate if there is any change in the bulk. Pursuant to
section 20A(4), if the total of the undivided shares of all the buyers exceeds
the whole of the bulk, each buyer's share is reduced proportionately. Where a
buyer has paid for some of the goods only, any delivery out of bulk is to be
ascribed first to the goods which have been paid for already (section
20A(5)).[419]
9.21 Section
20B has special provisions to facilitate normal trading. Each co-owner is
deemed to consent to a delivery to other co-owners of that part of the bulk due
to them under their contracts. He is also deemed to consent to any dealing with
or removal, delivery or disposal of the goods in the bulk by any co-owner in
respect of his undivided share (section 20B(1)). No cause of action shall lie
against anyone who has acted according to section 20B(1) relying on any such
deemed consent (section 20B(2)). In addition, section 20B(3) preserves the
contractual rights of
buyers.[420]
9.22 On
recommending sections 20A and B, the Law Commissions also made other
recommendations incidental to the issue. Before the enactment of the 1995 Act,
it was not certain whether a sale of an undivided share, specified as a fraction
(such as 1/3 or 40%), in specific goods was a sale of specific goods. As
recommended by the Law Commissions, the 1995 Act makes it clear that it is a
sale of specific goods by adding words to that effect in the definitions of
"goods" and "specific goods".[421]
It adds "and includes an undivided share in goods" and "and includes an
undivided share, specified as a fraction or percentage, of goods identified and
agreed on as aforesaid" at the end of each of the definitions respectively. The
Law Commissions have pointed out that the recommendations "are not confined
to undivided shares in bulk goods, but apply to undivided shares in any
goods".[422] Sections 20A and
B discussed above do not apply to sales of undivided shares specified as
fractions. The shares of buyers in such sales are determined by their sale
contracts, and the formula to determine the undivided shares in sections 20A and
B is not necessary and indeed cannot apply to such sales. The Law Commissions
said:
"The whole situation [of sales of undivided shares] is entirely different from that [of sales of specified quantities]. In the case of a sale of a specified quantity out of an identified bulk it is the quantity which is important: the reference to the bulk is just a way of partly ascertaining the goods covered by the contract. In the case of a sale of a share, such as a third or a half, of an identified bulk there is no mention of quantity at all and rules based on the quantity due to the buyer would be inappropriate."[423]
9.23 In France and Italy, as in Hong Kong, property in the goods
cannot pass until the goods are ascertained. Therefore, the provisions in these
two countries are not particularly helpful to our present problem. In Germany
and the Netherlands, delivery is generally required for property to pass, but it
is not required in Hong Kong. Since the mechanisms are different, the
provisions in these two countries are not of great assistance either.
Consequently, there are four options available which are as follows:
(a) no change;
(b) amending section 18 of Cap 26;
(c) adopting a provision similar to section 2 - 105(4) of the Uniform Commercial Code of the United States; and
(d) adopting a provision similar to sections 20A and B of the 1979 Act.
9.24 We
do not think that option (a) is realistic, given the concern and criticism which
have been voiced at the various unsatisfactory effects of section 18 discussed
above. The Consultation Paper sought views, comments and suggestions in
particular from the commercial sector on this issue.
9.25 We do not
favour option (b) for the following reasons. First, section 18 is regarded as
sensible in general. Sir Roy Goode has said, "[s]uch a rule is inevitable,
for one cannot speak of buying goods without knowing what one has
bought."[424] Secondly, the
Law Commission has pointed
out[425] that most traders in bulk
goods usually have no specific intention as to when property is to pass.
Thirdly, even if they have intended property to pass before ascertaining the
goods, there are still unresolved questions such as where several buyers have
claims upon the goods, the question as to their respective
interests.[426]
9.26 Option
(c), section 2-105(4) of the Uniform Commercial Code can tackle the problems
brought about by section 18 without amending or repealing it. However, the
section is too brief and does not cover some important issues, such as the
relationship between the quantity sold and the actual quantity of the bulk. The
Law Commission has said in relation to the section:
"It will be seen that, unlike the Uniform Sales Act, the Uniform Commercial Code does not deal expressly with the relationship between the quantity sold and the actual size of the bulk. This could give rise to problems to which no clear solution has yet been propounded in any common law jurisdiction. In particular, what is to happen if the bulk in respect of which the undivided shares are held is in fact less than assumed? Is the buyer's share to abate in the proportion which the amount sold bears to the actual whole? This may not be known at the time of delivery to the various buyers of parts of the bulk. As a result, delivery may well be made to an earlier buyer of an amount, part of which actually belongs to the others. Unless special provision is made, the earlier buyer may then both be liable in conversion to a later buyer and unable to pass good title to a bona-fide third party, who would also be liable in conversion."[427]
9.27 Option
(d) has attracted both support and criticism from commentators. We will deal
with the criticisms first in the following paragraphs.
9.28 There are
three major criticisms. First, the changes are said to be piecemeal and not
extensive enough. Janet Ulph has said, "it is merely a piecemeal reform and
that an opportunity for a wider review of co-ownership and also the law of
insolvency has been
missed."[428] But she
immediately continues that the obvious response is "that a more focused
reform, such as this one, [has] a better chance of being
enacted."[429] Tom Burns
finds that "such piecemeal changes can lack coherence ... [and] make the law
difficult for users to
access".[430] However, he
then says that the 1995 Act "has modernized the United Kingdom law and
brought it into line with other
jurisdictions."[431] In his
opinion, only codification can solve the issues and he knows that such a
prospect seems remote. Professor Michael Bridge comments that "an ad hoc
reform of this nature ... is no substitute for a root-and-branch review of the
whole law of passing of property and title
transfer."[432] We are of the
view that the implications of codification and review of the law of property
passing are too far-reaching to be dealt with in this Report.
9.29 The
second major criticism is that the 1995 Act does not provide for the allocation
of risks. Professor Guest finds that the Act is unclear as to the allocation of
risks concerning an undivided share in a
bulk.[433] Robert Bradgate and
Fidelma White have also said, "the absence of any provision dealing with the
transfer of risk creates uncertainty and may lead to
disputes."[434] Janet Ulph
also mentions that the 1995 Act is silent on the allocation of
risks.[435] But she justifies
that as a wise omission, since it would be too complicated to provide for every
possible eventuality which would make it out of place with the rest of the 1979
Act. We will deal with the issue of risk separately later.
9.30 The
third criticism is that the 1995 Act does not touch on a number of associated
principles. Nevertheless, Janet Ulph finds that the Law Commission's reluctance
to consider equitable principles is
sensible.[436] The Law Commission
considered that equity was flexible and discretionary and was therefore
inappropriate in a commercial
context.[437] Janet Ulph finds it
a legitimate concern since certainty is important in the commercial world. In
addition, Louise Gullifer agrees with the Law Commission that the problems of
possession "are not important enough to warrant a complicated set of special
provisions in the Act."[438]
This is because "nearly all the problems can be solved without recourse to
the concept of constructive
possession".[439]
9.31 Despite the criticisms, option (d) has its own merits. First,
Sir Roy Goode has suggested (before the enactment of sections 20A and B)
following the American example to solve the problems brought about by section 16
of the 1979 Act and said:
"Section 2-105(4) embodies a sensible approach to co-ownership which meets business needs and abandons the technical, if logical, distinction between an unidentified part of a bulk and a proportionate interest in a bulk. We would do well to emulate the American example."[440]
9.32 After
the enactment of the two sections, Sir Roy Goode has said, "[t]he Law
Commission advocated the adoption of a similar rule [to that in America] in
England. ... These recommendations have now been carried into effect by the
Sale of Goods (Amendment) Act
1995".[441]
9.33 Sections
20A and B have generally been welcomed by academics. Robert Bradgate and
Fidelma White have mentioned, "[m]easured against their apparent objectives,
the proposals [in the Law Commission report] seem generally
attractive."[442] In
addition, Janet Ulph has said, "[the new sections offer] a pragmatic solution
to the particular needs of international traders, and must therefore be warmly
welcomed."[443] John Whisson
said before the enactment of the new sections that the Law Commission report was
"a glimmer of hope for the
future".[444] In David
Brown's view:
"[the] Act is a welcome amendment to the law as regards bulk purchases, and results from a careful review and consultation exercise by the Law Commissions. It is suggested that the resulting legislation provides purchasers with some 'security' on the insolvency of a seller, whilst the officeholder is relieved of the burden of apportionment and the seller is relieved of undue storage costs."[445]
9.34 Sections
20A and B of the 1979 Act, based on the same principle as their US counterpart,
turn buyers of specified quantities from a bulk into tenants in common.
Sections 20A and B have specific provisions to regulate the relationship between
the quantity sold and the actual quantity of the
bulk,[446] and the relationship
between the co-owners
themselves.[447] As discussed
above, there is no such provision in the American counterpart, which was the
reason for its being criticised by the Law Commission. It is these specific
provisions which make option (d) more attractive than option (c). The
Consultation Paper sought views, comments and suggestion on its recommendation
of adopting option (d) specifically.
9.35 The recommendation was well
received by those who commented on the Consultation Paper. The Consumer Council
regards it as a crucial step towards protecting prepaying consumers in
sellers’ insolvency. Both the Chinese Manufacturers’ Association of
Hong Kong and the Judiciary Administrator’s Office share similar views.
The former welcomes the recommendation as it will help bring the rights of
buyers in line with their risk of bearing losses, and the latter expects that it
will reduce some unfairness resulting from the existing law on payment and
passing of property. We accordingly adopt this recommendation as set out in our
Consultation Paper.
9.36 The Consultation Paper also made some incidental
proposals in respect of the following issues:
(a) conditions for sections 20A and B to apply
(b) buyers of the bulk as co-owners
(c) special provisions to facilitate normal trading and regulate obligations among co-owners
(d) preserving buyers' contractual rights
(e) application to international sales
(f) risk
We received comments only in respect of proposals
(a), (e) and (f). We will address these comments in the course of examining the
relevant issues before making our recommendations.
9.37 There are three conditions: (a) a specified quantity; (b) an
identified bulk; and (c) a pre-paying buyer. First, the section only applies to
sales of specified quantities (for example, 1000 kg of grain) but not sales of
shares (one-half or 30%)[448] of a
bulk. Secondly, the specified quantity must be out of an identified bulk. One
member of our Sub-committee has observed that it might be difficult for a
consumer to identify the bulk from which he buys the goods. This is most likely
to arise for purchases through the Internet. If the bulk is not identified, the
proposed provision is unlikely to improve a consumer's position when the seller
becomes insolvent. The Consumer Council agrees with this observation and argues
that if an "identified bulk" is a pre-requisite, consumers may have difficulties
in identifying the bulk from which they buy the goods, and thus will be deprived
of the protection of sections 20A and B. This problem is particularly acute
where a shop or department store is wound up.
9.38 It must be pointed out
that sections 20A and B do not apply to a sale of generic goods, that is to say,
a certain quantity of goods in general without any specific identification of
them, such as two kg of Californian grapes. This is the way by which consumers
usually purchase goods. The way of purchasing goods forming part of an
identified bulk (such as 300 tons of wheat out of a cargo of 500 tons on board a
certain ship) is more commonly adopted by business buyers. By their very
nature, sections 20A and B are targeting business buyers. We find the condition
as to "an identified bulk" sensible because it must be at least possible to
identify the bulk from which the specified quantity comes. Property will not
pass in totally unidentified goods. The parties can identify the bulk "either
in the contract or by subsequent agreement". The 1995 Act defines
"bulk".[449] The definition is
intended to exclude a seller's general
stock.[450]
9.39 Thirdly,
the new section only applies to buyers who have paid for some or all of the
goods. Buyers who have only paid for some of the goods would obtain a
proportionate share. There have been criticisms of confining the new sections
to pre-paying buyers. First of all, the existing law allows property to pass
regardless of whether buyers have paid for the
goods.[451] In addition, the new
section allows a seller's insolvency officer to take advantage of market
movements by choosing whether or not to perform the
contract.[452] The rationale for
confining the application of the section to pre-paying buyers is that "this
is sufficient to meet the injustice which needs to be
remedied".[453] Buyers who
have not paid still have their money. It is the pre-paying buyers who lose both
their money and the goods. We therefore recommend that a buyer, having paid for
some or all of a specified quantity of goods forming part of an identified bulk,
becomes an owner in common of the bulk despite section 18 of
Cap 26.
9.40 When the three conditions are satisfied, property in an undivided
share would pass to a buyer unless the parties agree otherwise. The buyer's
share in the bulk as a co-owner is the proportion which the quantity bought and
paid for by him bears to the quantity in the bulk (section 20A(3)). The shares
of a buyer fluctuate if there is any change in the bulk. If, for instance, a
buyer (B) buys 100 kg of grain out of a bulk (1000 kg) from a seller (S),
B's share is 10%. If the bulk is reduced to 500 kg because of, for
example, delivery to another buyer, B's share becomes 20%. This is regarded as
a "sensible"[454] approach. Once
the bulk is reduced to 100 kg or less and B is the only buyer, B will own the
whole bulk. This is the common law rule on ascertainment by
exhaustion[455] and is reflected
in section 18 rule 5 (3) introduced by the 1995 Act. Section 18
rule 5(4)[456] gives effect
to a related common law rule:[457]
rule 5(3) also applies where under various contracts, there is one buyer of the
remaining goods from a bulk which is reduced to (or to less than) the total
quantities due to that buyer. Rule 5(3) and (4) applies whether or not a buyer
has paid any part of the price unless there is a contrary intention that
property is to pass only on payment of the
price.[458] The addition of rule
5(3) and (4) has been well-received as giving "statutory effect to well
established common law
developments".[459]
Accordingly, we recommend adopting sections 20A (3) and 18 rule 5 (3) and (4) of
the 1979 Act.
9.41 Pursuant to section 20A(4), if the total of the
undivided shares of all the buyers exceeds the whole of the bulk (which has been
reduced) and all the buyers' entitlements cannot be satisfied, each buyer's
share is reduced proportionately to each buyer's share in the original bulk.
After the reduction, the total undivided shares of all the buyers will be equal
to the whole remaining bulk. We will deal with section 20A(4) in greater detail
in the paragraphs on the issue of risk later.
9.42 Section 20A (5) and (6) deals with the issues of part payment and
delivery. Where a buyer has paid for some of the goods only, any delivery out
of the bulk is to be ascribed first to the goods which have been paid
for[460] (section 20A(5)). This
is in line with the existing law since section 28 of the 1979 Act (section 30 of
Cap 26) makes payment and delivery concurrent conditions. Section 20A(6) makes
it clear that a part payment for any goods is to be treated as a payment for a
corresponding portion of the
goods.[461] This subsection is
taken as confirming "what may be already
assumed".[462] We recommend
adopting section 20A(4)-(6).
9.43 Section 20B has special provisions to facilitate normal trading
and regulate obligations among co-owners. It must be pointed out that the
co-ownership brought about by section 20A is a special type of co-ownership,
"in relationship to which the normal rules of co-ownership would be too
restrictive".[463] Indeed,
all the co-owners envisage that "the bulk will be divided up in the normal
course of events".[464]
Co-owners are deemed to consent to a delivery to other co-owners of that part
due to them under their contracts from the bulk even if the delivery would bring
about or increase a shortfall (section 20B(1)(a)). This provision is necessary
for clearing doubt and regulating relationships among co-owners as the Law
Commission has pointed out:
"There are sound practical reasons for allowing deliveries to take place on a first come, first served basis. When deliveries begin the seller (or carrier, or warehouseman) may not know that there is likely to be a shortage. Moreover, it would often be impracticable to sort and apportion the goods. ... There was weighty support on consultation for allowing deliveries in accordance with contracts on a first come, first served basis even in cases of shortfall or potential shortfall."[465]
9.44 Co-owners
are also deemed to consent to any dealing with or removal, delivery or disposal
of the goods in the bulk by any co-owner in respect of his undivided share
(section 20B(1)(b)). This provision is necessary as "co-owning buyers should
be able to deal freely with the goods falling within their respective
shares"[466] in the same way
as a seller can deal with his remaining share of the bulk. The Law Commission
has pointed out that the deemed consents would not apply to over-sales by a
seller who remains in possession of the goods or documents of title to the
goods, bringing in new co-owners when the bulk is already insufficient for the
existing co-owners.[467] This is
because the deemed consent in section 20B(1)(b) applies only where the goods
disposed fall within the undivided share of the co-owner in question (ie the
seller) at the time of the disposal. Section 20B(2) further provides that no
cause of action shall lie against anyone who has acted according to section
20B(1) relying on any such deemed consent. This is necessary to protect
insolvency office-holders, warehousemen, carriers, etc who, relying on the
deemed consents, may have to deal with the goods.
9.45 Section 20B(3) clarifies three matters. First, there is no
obligation on buyers who take delivery out of the bulk to compensate other
buyers who may receive less than their contractual quantities (section
20B(3)(a)). This is justifiable, as under the existing law buyers are not
liable to compensate other buyers for short deliveries who can still claim
against the seller. In addition, there are practical difficulties in putting
this type of compensation scheme in practice and into a statutory rule as the
Law Commission has mentioned:
"The weight of argument on consultation was clearly in favour of having no statutory rule requiring one buyer to account to others where deliveries were made in the normal course of trading. ... It would be highly inconvenient if, in cases not covered by mutually agreed adjustment schemes, this were to be changed. The first buyer has no control over what happens to the bulk and may have no knowledge of the existence of later buyers. Claims might arise long after the first delivery, particularly in the case of goods stored on land. There could be severe difficulties of proof and the net result of a great deal of inconvenience and dispute would, at best, be the replacement of one claim for damages against a seller by several lesser claims."[468]
9.46 Secondly,
despite section 20B(3)(a), there is nothing to prevent the parties agreeing
among themselves to any adjustment scheme (section 20B(3)(b)). This is to
preserve the parties' freedom to deal with the matter of short delivery.
Thirdly, nothing in section 20A or B affects a buyer's rights against the seller
under their contract. This is to put beyond doubt that a buyer retains his
usual rights against the seller, for example, concerning defective goods or
short delivery. For the reasons mentioned above, we recommend adopting section
20B.
9.47 Sir Guenter Treitel has pointed out that there may be
difficulties in applying sections 20 A and B to international sales. First,
section 20A(1)(a) requires the bulk to be "identified either in the contract
or by subsequent agreement between the parties". It is not clear whether an
identification of the bulk by a notice (for example, a notice of
appropriation[469]) given by a
seller (which is common in international sales) would suffice. Sir Guenter
Treitel has said:
"Where the contract requires the seller to give a notice of appropriation, it can be argued that the buyer has assented in advance to whatever appropriation the seller may make, so long as it satisfies the requirement of the contract; but even if this argument is accepted, the buyer's advance assent given in the contract can hardly be evidence of a 'subsequent agreement'. It is even harder to find evidence of subsequent agreement where the contract contains no provision as to notice of appropriation and the seller, after the making of the contract, simply gives such a notice. So long as the notice is valid, the buyer has no choice in the matter: if the seller validly appropriate goods on the Peerless I, the buyer cannot object merely because he would have preferred goods on the Peerless II. Such cases are hard to bring within the literal meaning of the words of section 20A(1)(a)"[470]
9.48 In
a typical CIF contract, a seller will usually be under an obligation to
notify[471] the buyer of the
particulars of the shipment such as the particulars of the vessel carrying the
goods which are appropriated to the contract, the date of the shipment, etc.
This is the time when identification of the bulk arguably takes place. In a FOB
contract, a seller will usually tender the bill of lading or other shipping
documents to the buyer for
payment.[472] This may also be
the time when identification of the bulk takes
place.[473] Sir Guenter Treitel
has pointed out that if the reported cases are any guide, it is uncommon for FOB
sellers to ship goods in bulk in order to perform contracts with more than one
buyer.[474] Therefore, sections
20A and B will only rarely apply to FOB contracts.
9.49 For the avoidance
of doubt, there may be a need to expressly cover such subsequent identifications
in accordance with a seller's express or implied obligation under a sale
contract, and we recommend accordingly.
9.50 Secondly, section 20A(1)(b)
requires that a buyer must have "paid the price for some or all of the goods
which are the subject of the contract and which form part of the bulk".
There is little difficulty in applying this to cases where payments are in cash.
But in international sales, payments are more commonly made by documentary
bills[475] or documentary
credits.[476] Sir Guenter Treitel
has said:
"Where the contract provides for payment in one of these ways, property in ascertained goods can pass on acceptance of a draft by the bank or on acceptance of the bill of exchange by the buyer, even though that acceptance is subsequently dishonoured by non-payment;[477] but in the case of a contract for the sale of a specified quantity out of a bulk, if this method of payment is adopted, and fails, then it seems that the case would not be one in which 'the buyer ha[d] paid the price' within section 20A(1)(b). The same may be literally true if payment under a documentary credit is made by the bank; but even if such a case is not literally one in which 'the buyer has paid the price', it is clearly one in which payment had been made on his behalf, and such a payment should, it is submitted, suffice for the purpose of section 20A(1)(b)."[478]
9.51 He
is of the opinion that if the price is paid
outright,[479] even though it is
made by a bank on behalf of a buyer, it falls within section 20A(1)(b). But if
payment is made by a documentary bill which is a term
bill[480] and the buyer has
accepted the bill in exchange for the shipping document, problems will arise
where subsequently the buyer has dishonoured by
non-payment.[481] Sir Guenter
Treitel has said that the buyer will then not be regarded as having "paid" for
the purpose of section 20A(1)(b). As mentioned in the above quotation, if the
goods are ascertained goods, Sir Guenter Treitel is of the view that property in
the goods will still pass.[482]
He has not further explained but has referred to para
18-170[483] which states:
"[s]ection 19(3) [equivalent to section 21(3) of Cap 26] says that the buyer must return the bill of lading if he 'does not honour the bill of exchange.' A bill of exchange may be dishonoured in two ways, by non-acceptance and by non-payment; and section 19(3) does not expressly say which of these kinds of dishonour it contemplates. The reasoning of the Privy Council in The Prinz Adalbert[484] however, suggests that it is dishonour by non-acceptance which is the crucial factor in preventing the passing of property. ... In that case Lord Sumner considered the position...[that[ 'If the shipper, being then owner of the goods, authorizes and directs the banker ... to surrender the bill of lading against acceptance of the draft, it is natural to infer that he intends to transfer the ownership when this is done, but intends also to remain the owner until this has been done. ...' A seller who wants to retain the property until the draft is actually paid can of course include a stipulation to this effect in the contract, or achieve the same result by providing that payment must be by cash against bill of lading."[485]
9.52 Similar
problems can arise when payment is made by documentary credit. A documentary
credit is basically a banker's assurance of payment against presentment of
specified documents. In international sales, almost all documentary credits are
expressed to be subject to the Uniform Customs and Practice for Documentary
Credits (the "UCP") published by the International Chamber of
Commerce.[486] Article 2 of the
UCP defines a documentary credit as follows:
"any arrangement, however named or described, whereby a bank (the 'Issuing Bank') acting at the request and on the instructions of a customer (the 'Applicant') or on its own behalf,
(i) is to make a payment to or to the order of a third party (the 'Beneficiary'), or is to accept and pay bills of exchange (Draft(s)) drawn by the Beneficiary, or
(ii) authorises another bank to effect such payment or to accept and pay such bills of exchange (Draft (s)), or
(iii) authorises another bank to negotiate,
against stipulated document(s), provided that the terms and conditions of Credit are complied with."
9.53 In
essence, by an arrangement with an applicant (a buyer), a bank is (i) to make a
payment to the beneficiary of the arrangement (the seller), (ii) to accept and
pay a bill of exchange drawn by the seller, or (iii) to authorise another bank
to do either (i) or (ii) or to negotiate (ie purchase) the stipulated
documents.[487] There is no
problem if the bank pays the seller outright, but if the bank accepts or
authorises another bank to accept a bill of exchange, or authorises another bank
to purchase the stipulated documents, there may be default in payment
subsequently. In this case, according to Sir Guenter Treitel, the buyer may not
be regarded as having "paid" for the purpose of section
20A(1)(b).
9.54 According to Sir Guenter Treitel, by applying the
reasoning of the Privy Council in The Prinz Adalbert case, in the case of
ascertained goods, it is the acceptance of a bill of exchange which is crucial
to the passing of property. The Consultation Paper concluded that such
reasoning should also apply to a sale of a specified quantity out of an
identified bulk so as to tackle the problems concerning the requirement of
having "paid" in respect of payment by documentary credit and documentary bill
as mentioned by Sir Guenter Treitel. The spirit of sections 20 A and B is to
protect pre-paid buyers against sellers' insolvency. The requirement of having
"paid" in sections 20A and B should not be a hindrance to applying the reasoning
in The Prinz Adalbert case to a sale of a specified quantity out
of an identified bulk if Cap 26 has expressly provided for it. A balance
has to be struck between protecting buyers on the one hand and sellers on the
other. Furthermore, if a seller wants to retain the property until he is paid,
he can stipulate that in the contract as stated by Lord Sumner in The Prinz
Adalbert case. The Consultation Paper accordingly made the following
recommendation (which is endorsed specifically by Professor Hugh Beale): the
requirement of having "paid" in sections 20A and B should be treated as having
been fulfilled if (a) a buyer has accepted a bill of exchange under a
documentary bill; or (b) the relevant bank has accepted a bill of exchange or
has purchased the stipulated documents under a documentary credit, regardless of
whether there is any default in payment subsequently. The Judiciary
Administrator’s Office suggests that since payments are also commonly made
by post-dated cheques, the deeming provision should also apply to such
payments.
9.55 The reason for recommending that the deeming provision
should apply to payment by documentary bill or documentary credit is because,
according to Sir Guenter Treitel, by applying the reasoning in The Prinz
Adalbert case, in the case of ascertained goods, it is the "acceptance" of a
bill of exchange instead of the subsequent payment which is crucial to the
passing of property. An "acceptance" is a promise in writing on the bill by a
drawee to pay a sum of money to a holder of the bill when the bill is due in
accordance with the terms of the acceptance. Although a cheque is a bill of
exchange, it is a special kind of bill of exchange. In the ordinary course,
cheques are not, and are not intended to be, accepted. A holder of a cheque, as
between himself and the drawer, has no right to require
acceptance.[488] While it cannot
be said that a cheque can never be accepted, it is only accepted in very
exceptional circumstances and would require strong and unmistakable
words.[489] Therefore, the
principle in The Prinz Adalbert case does not apply to payment by cheque.
We therefore adopt the recommendation in the Consultation Paper without
amendment.
9.56 Thirdly, section 20A(6) provides that a part payment for
any goods is to be treated as a payment for a corresponding portion of the
goods. Sir Guenter Treitel has said that the application of this rule to
international sales may "give rise to an incongruous
result".[490] This is because in
such sales, the normal position is that property does not pass (since it is not
intended to pass) until the price has been fully paid. For example, in an
international sale, if a buyer buys the entire bulk but pays only part of the
price, he will normally at this stage obtain no property at all. Sir Guenter
Treitel has doubted why section 20A should put a buyer of an undivided share in
a better position than one who buys the whole. But he justified the provision
as follows:
"The policy of the 1995 reforms is to protect the buyers while the prima facie common law rule stated above is based on the converse policy of protecting the seller against the risk of the insolvency of the buyer. The rule laid down by section 20A for cases of part payment appears to achieve a satisfactory compromise between these two policies. In proportioning the buyer's proprietary interest to the amount of his payment, it satisfactorily protects each party against the risk of the other's insolvency. This statutory solution applies in terms only where the specified quantity sold forms 'part of a bulk' and cannot therefore displace the common law rule which prima facie applies where the whole bulk is sold to the same buyer. But the fact that the compromise is a satisfactory one is at least a plausible ground for arguing that, where the goods form part of a bulk, the statutory compromise which applies in cases of part payment for the quantity bought, should not be displaced merely because the contract is on c.i.f. or f.o.b. terms and because in such sales property prima facie passes only on payment in full. It could of course be displaced by other evidence of contrary intention: eg by an express term that property should pass only on payment in full."[491] (emphasis added)
9.57 We
agree that the provision on part payment is a sensible balance. It applies only
where the conditions in section 20A are fulfilled (such as "part of a bulk") and
therefore, will not affect the case where a buyer buys the entire bulk. Since
the parties can contract out of the application of section 20A, the provision on
part payment should not be excluded solely because it is an international sale
on CIF or FOB terms. An express term is needed in order to exclude the
provision on part payment. We therefore make no recommendation concerning this
remark by Sir Guenter Treitel.
9.58 Section 22 of Cap 26 provides the general rule that risk passes
with property, unless otherwise agreed. This general rule presumably also
applies to a sale of a specified quantity of unascertained goods forming part of
an identified bulk.[492] But some
academics are of the view that the matter is complicated by section 20B(3)(c)
which provides that nothing in sections 20 A and B shall "affect the rights of
any buyer under his contract." Professor Guest has said:
"[o]n one view this saving provision leads to the conclusion that, in deciding whether or not the risk has passed to the buyer in goods not yet separated from bulk, the passing of property under section 20A is to be wholly disregarded and that the allocation of risk is to be determined without reference to the effects of that section."[493]
9.59 But
he immediately states:
"[o]n another view, however, the purpose of the saving provision is simply to make it clear that the rights of the buyer, eg to sue for damages for non-delivery of the contract goods, are preserved and not to provide that section 20A should be left out of account in determining risk. The latter view is, it is submitted, the better one."
9.60 We
agree that the latter view is more justifiable, especially since risk concerns
liabilities, not rights. The legislative intent of section 20B(3)(c) can be
found in the Law Commission
report[494] which mentions a
buyer's entitlement to have goods which conform to the contract in quantity and
quality when considering a buyer's "contractual rights". In addition, as
section 20B(3)(c) preserves a buyer's rights under his contract, this should be
understood in the context of the existing law. Under the existing law, a buyer
may be subject to the passing of risk, regardless of his rights in the
goods.
9.61 As mentioned above, in the opinion of Robert Bradgate and
Fidelma White, the absence of any provision on risk creates uncertainty.
Section 20B(3)(c) reserves a buyer's rights under his contract, including his
entitlement to have goods of merchantable quality. But where a person agrees to
buy goods forming part of a bulk, the risk of loss or damage may pass before his
goods are separated. They accordingly doubt whether section 20B(3)(c) is
adequate to preserve a buyer's rights. We would point out, however, that
according to Professor Atiyah, risk is concerned with "accidental destruction
or deterioration and ... damage to the goods [not] caused by the fault of either
party."[495] If the goods are
destroyed or damaged by a seller's fault, the buyer can still claim against the
seller even though risk has passed. Both common
law[496] and
statute[497] require the goods
sold to be durable. Professor Atiyah accurately summarises the law when he
states that "the goods, when delivered, should have the capacity to remain
reasonably fit for the purpose, and retain their non-functional attributes, for
a reasonable time."[498] If
the goods deteriorate at an unreasonably fast rate, a buyer may claim against
the seller for breaching the implied term on merchantable quality despite the
passing of risk.
9.62 Professor Guest has said that the question of risk
is not susceptible of an easy
solution.[499] On the one hand,
it can be argued that risk should pass only when the property in full (not just
an undivided share) passes. On the other hand, Professor Guest finds it
remarkable that a seller should continue to bear the risk, even though the
property of the undivided share has passed and he is no longer the
owner.
9.63 Professor Guest believes that the court may adopt the opinion
of Scrutton LJ: "the transfer of the undivided interest carries with it the
risk of something happening to the
goods".[500] This is in line
with the general rule in section 22: risk follows property, unless otherwise
agreed. The Consultation Paper concluded that it was fair for a buyer to bear
the risk when the property of the undivided share passed to him. Undoubtedly,
despite this general rule, the parties should be free to specify their own
arrangement as to the allocation of risk. The Consultation Paper therefore
concluded that there was no need to have a separate provision on
risk.
9.64 Professor Hugh Beale agrees with this
conclusion.[501] Since the
property of the goods will pass to a buyer when he pays, or is deemed to have
paid, the Judiciary Administrator’s Office questions whether there is any
need to spell out when the risk is deemed to pass. In response, we would point
out that a buyer must fulfil the following three conditions before the property
of the goods passes to him: (a) specified quantity; (b) identified bulk; and (c)
pre-payment. As long as these conditions are fulfilled, the property will pass
even though a buyer is only deemed to have paid for the goods. Once the
property passes, risk will follow. We therefore do not think there is a need to
have a separate provision to spell out when the risk is deemed to pass. We
accordingly confirm the recommendation in the Consultation Paper
unamended.
9.65 The remaining question is how risk should be allocated if
only part of the bulk is lost or destroyed. Professor Guest has
argued[502] that a seller and his
buyers should bear the pro rata share of the risk if the seller retains
some shares of the bulk.[503] If
the seller has not retained any share, the buyers should bear the risk pro
rata to the extent of each of their shares in the bulk. Other writers have
taken contrary views.[504] They
suggest that a seller should first bear the risk to the extent of the shares he
retains in the bulk, before a buyer begins to assume any risk.
9.66 We
are of the view that section 20A(3) and
(4)[505] has provided for the
above question. The Law Commission has explained its effect as follows:
"... the buyers' shares accurately reflect the quantities purchased ... and the seller's share reflects what is left. ... the effect of the formula is that the risk of partial destruction of the goods rests with the seller (in the absence of agreement to the contrary) so long as the quantity destroyed is within the quantity retained by the seller."[506]
9.67 The
following example illustrates the effect. In scenario 1, B1 and B2 respectively
buy 400 kg and 200 kg of beans out of a bulk of 1000 kg from S. In scenario 2,
400 kg are lost and the bulk is reduced to 600 kg while in scenario 3, a further
300 kg are lost and the bulk is reduced to 300 kg. The quantities held,
undivided shares and shares of the risk of S, B1 and B2 would be as
follows:
|
|
Scenario 1
|
Scenario 2
|
Scenario 3
|
|||||
|
|
Quantities held
|
Undivided shares
|
Quantities held
|
Undivided shares
|
Shares
of risk
|
Quantities held
|
Undivided shares
|
Shares
of risk
|
|
S
|
400 kg
|
400/1000
|
-
|
-
|
400
kg[507]
|
-
|
-
|
400 kg
|
|
B1
|
400 kg
|
400/1000
|
400 kg
|
400/600[508]
|
-
|
200 kg
|
200/300[509]
|
200
kg[510]
|
|
B2
|
200 kg
|
200/1000
|
200 kg
|
200/600
|
-
|
100 kg
|
100/300
|
100 kg
|
|
Loss
|
-
|
-
|
400 kg
|
-
|
-
|
700 kg
|
-
|
-
|
|
Total
|
1000 kg
|
1000/1000
|
600 kg
|
600/600
|
400 kg
|
300 kg
|
300/300
|
700 kg
|
9.68 It is fair for S to bear the risk first since B1 and B2 have paid
for their undivided shares. As long as the quantity lost, damaged, etc is
within that retained by S, he should be the first to assume the liability. The
Law Commission has said that the co-ownership brought about by section 20A is a
special type, in relation to which the normal rules of co-ownership may not be
appropriate.[511] We therefore
make no particular recommendation on the matter of risk.
|
Recommendation 24
We recommend that provisions on sales of a specified quantity of
unascertained goods forming part of an identified bulk similar to those in
section 18 rule 5(3) and (4) and sections 20A and B of the 1979 Act should be
made in Cap 26, namely:
(a) where the goods or some of them form part of a bulk identified in
the contract or by subsequent agreement between the parties or by subsequent
conduct of the seller in accordance with the terms of the contract, and a buyer
has paid for the goods or some of them, unless otherwise agreed, property in an
undivided share in the bulk passes to the buyer who becomes an owner in
common;
(b) the undivided share of a buyer in a bulk at any time shall be such
share as the quantity paid for and due to the buyer bears to the quantity of
bulk at that time, provided that where the aggregate of the undivided shares of
all the buyers exceed the whole of the bulk, the undivided share of each buyer
shall be reduced proportionately so that the aggregate is equal to the whole
bulk;
(c) where a buyer has only paid for some of the goods out of a bulk, any
delivery shall first be ascribed to the goods which has been paid for;
(d) part payment for any goods shall be regarded as payment for a
corresponding part of the goods;
(e) a buyer shall be deemed to have paid for the goods or some of them
if (a) he has accepted a bill of exchange under a documentary bill; or (b) the
relevant bank has accepted a bill of exchange or has purchased the stipulated
documents under a documentary credit, regardless of whether there is any default
in payment subsequently;
(f) where the goods are in a deliverable state and the bulk is reduced
to (or to less than) the quantity sold to a buyer, and the buyer is the only
buyer to whom goods are due out of the bulk, (i) the remaining goods are taken
as appropriated when the bulk is so reduced, and (ii) the property in those
goods passes to the buyer;
(g) the above paragraph applies where a bulk is reduced to (or to less
than) the aggregate quantities due to a buyer under separate contracts relating
to that bulk and he is the only one to whom goods are due out of that
bulk;
(h) anyone who has become an owner in common of a bulk shall be deemed
to have consented to (i) any delivery to any other co-owner of goods due to him
out of the bulk, and (ii) any dealing with or removal, delivery or disposal by
any other co-owner of goods out of the bulk provided the goods are within his
undivided share;
(i) no cause of action shall accrue to anyone against a person by reason
that the latter has acted in reliance on the above consents in the above
paragraph;
(j) nothing in above shall:
- require a buyer to compensate other buyers for any shortfall; (k) a "bulk" means a mass or collection of goods of the same kind which
(a) is contained in a defined space or area; and (b) is such that any goods in
the bulk are interchangeable with any other goods therein of the same number or
quantity.
|
9.69 As mentioned above, the 1995 Act in England prompted by the Law
Commission Report[512] makes it
clear that a sale of an undivided share, specified as a fraction (such as 1/3 or
40%), in specific goods is regarded as a sale of specific goods. To achieve
this, the 1995 Act extends the definitions of "goods" and "specific
goods".[513]
9.70 The Law
Commission stated in its
Report[514] that the purpose of
extending the two definitions was to remove doubts. The Law Commission
identified two main arguments for recommending the inclusion of "an undivided
share" in the definition of "goods". Firstly, section 2(2) of the 1979 Act
recognises that there may be a contract of sale between one part owner and
another. The Law Commission therefore has argued that it may be "the natural
implication", in its context, from section 2(2) that "an undivided share" should
be included in the definition of
"goods".[515] Secondly, the Law
Commission argued that an undivided share in goods was intended to be within the
1979 Act.[516] It cited Van
Cutsem v Dunraven[517]
and Marson v
Short[518] as the
authorities.
9.71 The Law Commission's argument for extending the
definition of "specific goods" was that where there was a sale of an undivided
share of specific goods, for example a horse, it would be inconvenient if the
undivided share was regarded as unascertained
goods.[519] It would be absurd
that, in the case of goods which could not be divided without losing its
identity, property in the share could never
pass.[520]
9.72 In the
following paragraphs, we will first discuss the Law Commission's arguments for
extending the two definitions. This amounts to a discussion of the legal
position before the 1995 Act since the Law Commission based its arguments on the
existing law at that time. This also reflects the existing position of Hong
Kong, which is the same as that in England before the 1995 Act.
9.73 As
to the Law Commission's first argument for extending the definition of "goods",
Sir Roy Goode is of the view that section 2(2) of the 1979 Act only applies
where a co-owner transfers his whole
interest.[521] On the other hand,
Professor Sealy has said that section 2(2) also applies where a co-owner
transfers only part of his
interest.[522] He has further
said that it is not clear whether section 2(2) applies to other analogous
transactions.[523] On another
occasion, he has said, "it [is] taken for granted that the owner of a part
interest in goods could sell it to any person other than a
co-owner".[524] Professor
Bridge has also mentioned that "by common law analogy, the relevant
provisions of the Sale of Goods Act could be applied to a contract concerning
the sale of an undivided
share".[525] It appears that
the issue is unsettled.
9.74 As to the Law Commission's second argument,
Van Cutsem v
Dunraven[526] is only a
first instance unreported case on the now repealed section 4 of the 1893 Act.
It was reported in the Current Law
Yearbook[527] without analysis of
the reasons why an undivided share in goods was intended to be within the 1979
Act. Another case cited by the Law Commission was Marson v
Short.[528] It was held that
a sale by the owner of a horse of a half share in it was a sale of goods for the
Stamp Act purposes. First, this case was about the Stamp Act. Secondly, once
again, there was not much analysis of whether an "undivided share" was "goods"
or a chose in action. There is a case stating that a part share in goods is a
chose in action. In Re Sugar Properties (Derisley Wood)
Ltd,[529] a part share in a
horse was treated as a chose in action, but in the context of section 4 of the
Bills of Sale Act 1878 in which the concept of transfer by delivery was central.
Therefore, before the 1995 Act, it was not clear whether a part share in goods
was "goods" or not. Professor Sealy said before the 1995 Act, "[a] contract
for the transfer of an undivided share in a specific chattel (or, semble, any
goods) is a contract of sale of goods within the Act .... Whether it follows
that a part-interest in goods is itself 'goods' is uncertain
...."[530]
9.75 In Hong
Kong, the position concerning a sale of undivided shares specified as a fraction
is as uncertain as it was in England before the 1995 Act. Section 3(1) of Cap
26, which is modelled on section 2(2) of the 1979 Act, also recognises that
there may be a contract of sale between one part owner and
another.[531] Similar to the
position of England then, the effect of section 3(1) is not entirely clear. It
is also uncertain whether a sale of an undivided share, specified as a fraction,
in specific goods is regarded as a sale of goods, or more precisely, specific
goods. It would be preferable to clarify this in Cap 26. Extending the
definitions of "goods" and "specific goods" in Cap 26 in the same way as in
the 1995 Act can be an option.
9.76 No cases can be found on the two
extended definitions introduced by the 1995 Act. Some academics have mentioned
the extended definitions in their books, including Professor
Sealy,[532] Professor Michael
Bridge[533] and Sir Guenter
Treitel.[534] Professor Sealy has
commented, "[i]t is thus made clear beyond doubt that the sale of an
undivided share in goods ... is governed by the
Act."[535] On the other hand,
Sir Guenter Treitel has expressed his view on the practical side, "[i]t is
possible for a seller who is fraudulent, careless or forgetful to sell a number
of fractions which together amount to more than the whole: e.g. to sell one
quarter of a cargo to each of five
buyers."[536]
9.77 Academics
have found the extended definitions generally acceptable. However, we will
discuss the following issues before drawing any conclusion.
9.78 First,
the exact effect of section 3(1) of Cap 26 and whether a sale of an undivided
share expressed in a fraction in goods is governed by Cap 26 are still far from
clear. The extended definitions in the 1995 Act would put this beyond doubt.
The question is whether it is necessary, at least at this stage, to justify
conceptually why "an undivided share" of goods is goods (chattel), but not a
chose in action. In replying to this question, Professor Reynolds has said,
"I do not myself see much problem in calling such interests goods whatever
the position before the Act (which was indeed
uncertain)."[537]
9.79 Secondly,
there is the implication of extending the two definitions. The Law Commission
has pointed out that since an undivided share in goods cannot be physically
possessed or delivered, the provisions on possession and delivery in the 1979
Act will simply disapply
themselves.[538] This arises most
obviously where the goods cannot be divided up, as in respect of a share in a
boat or a horse.[539] The
intention of the parties will then prevail.
9.80 This is also true for
the other provisions of the 1979 Act which are based on possession or delivery.
For example, section 18 of the 1979 Act (equivalent to section 20 of Cap 26)
provides rules for ascertaining the intention of the parties as to the time at
which the property is to pass. All these rules refer to the goods being in a
deliverable state or being delivered, and would therefore not apply to an
undivided share which is never in a deliverable state and cannot be delivered.
As a consequence, the intention of the parties will prevail in respect of
matters concerning possession or delivery. Sections 27 to 37 of the 1979 Act
(equivalent to sections 29 to 39 of Cap 26) relating to performance of contracts
provide another example. These provisions are also based on delivery and
accordingly are inapplicable to a sale of an undivided share. Again, this would
mean that the obligations of the parties depend on the contract itself. The Law
Commission is of the view that this is "not so obviously unsatisfactory that
any special rule is
required."[540]
9.81 Another practical consequence is how will the statutory implied
terms in sections 14 to 17 of Cap 26 (one of the major benefits to buyers of
falling within Cap 26) apply to undivided shares? There should be no
problem in applying these terms once the goods which are the subject matter of
the undivided shares are physically
separated.[541] But how will
these terms apply if the shares remain
undivided?[542] It seems that the
implied terms as to a right to sell and freedom from encumbrance would apply to
a sale of an undivided share. But other implied terms such as quiet possession,
correspondence with description, etc would probably disapply
themselves.
9.82 Most provisions in Cap 26 will therefore not apply to a
sale of an undivided share, including most of the statutory implied terms which
protect buyers. In respect of many aspects, the intention of the parties will
prevail. Moreover, the implication of extending the two definitions is not free
of doubt. Professor Sealy has said that the Law Commission has not considered
the implication other than the passing of property, delivery and acceptance, and
whether the change will be of any practical consequences remains to be
seen.[543]
9.83 The Law
Commission has emphasised that extending the two definitions is only a minor
amendment to remove some elements of
doubt.[544] We are not aware of
any particular hardship relating to this issue, especially in ordinary consumer
transactions. We therefore do not see any urgency for extending the two
definitions. Professor Hugh Beale considers our reservations sensible. We
therefore conclude that the two definitions should not be extended until the
implications of the extension in England become clearer.
9.84 Section 13(3) of Cap 26 provides as follows:
"Where a contract of sale is not severable, and the buyer has accepted the goods or part thereof, the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty, and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is a term of the contract, express or implied, to that effect."
9.85 Under
section 13(3), where a contract of sale is not severable, a buyer who has
accepted some of the contract goods will be treated as having accepted all the
contract goods. The effect is that he will lose his right of rejection.
Therefore, the options he has are either to accept all the goods or to reject
all of them, even though he still has the right to claim damages in either case.
He cannot reject the non-conforming goods and keep the conforming ones. In
other words, once he has accepted any goods, he cannot reject any of the
contract goods even though some of them may not conform to the contract. For
example, if a buyer has 100 kg of grain delivered to him, 30 kg of
which do not conform to the contract, the buyer would then have to decide
whether to accept or reject the whole 100 kg.
9.86 Section 32(3) of Cap
26 provides for an exception to this general rule. Where the goods delivered to
a buyer consist of goods of a different description to those included in the
contract, the buyer may accept the goods which are in accordance with the
contract and reject the rest, or he may reject the whole. Section 32(3) reads
as follows:
"Where the seller delivers to the buyer the goods he contracted to sell mixed with goods of a different description not included in the contract the buyer may accept the goods which are in accordance with the contract and reject the rest, or he may reject the whole."
9.87 The
problem of the existing law is that it forces buyers to choose either to accept
or reject all the contract goods when only some of them do not conform to the
contract. For various reasons, the general rule in section 13(3) is too
stringent and the exception in section 32(3) is too narrow. First, it is
reasonable and sensible to allow buyers to be able to reject only the
non-conforming goods and accept the rest. In the example given above, it will
make more commercial sense, from both the buyer's and seller's points of view,
if the buyer can reject the 30 kg non-conforming grain and accept the
remaining 70 kg, instead of either accepting or rejecting the whole. Secondly,
the all-or-nothing approach in section 13(3) not only deprives buyers of
choices, but also may not necessarily be in sellers' interests. For example, if
a buyer is forced to reject all the contract goods, the seller will then have to
refund more of the contract price. Thirdly, the exception in section 32(3) only
applies to the delivery of goods of a different description not included in a
contract. It is questionable why the exception only applies to delivery of
goods of a different description, but not to other breaches such as breaches in
respect of quality, fitness for purpose, correspondence with sample, etc. The
Law Commission of England and Wales has stated:
"the difference between description and quality is often so slight that it is not easy to justify a different result depending on whether the breach of contract related to description or to quality."[545]
9.88 In the following paragraphs, we will discuss the position in
other jurisdictions first before making recommendations. Section 2-601 of the
Uniform Commercial Code of the United States provides:
"Subject to the provisions of this Article on breach in installment contracts (Section 2-612) and unless otherwise agreed under the sections on contractual limitations of remedy (Sections 2-718 and 2-719), if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may
(a) reject the whole; or
(b) accept the whole; or
(c) accept any commercial unit or units and reject the rest."[546]
9.89 Under
section 2-601, a buyer's right of partial rejection is relatively wide. He can
reject the non-conforming goods and retain the rest. Indeed, he can reject all
or any of the non-conforming goods, as well as all or any of the conforming
goods. The only limitations on his right of partial rejection are the
requirements as to good faith and commercial reasonableness. Therefore, buyers
cannot reject goods forming part of a commercial unit so as to avoid undue
impairment of the value of the remaining portion of the goods. The Official
Comment[547] on section 2-601
summarises its effect:
"A buyer accepting a non-conforming tender is not penalized by the loss of any remedy otherwise open to him. This policy extends to cover and regulate the acceptance of a part of any lot improperly tendered in any case where the price can reasonably be apportioned. Partial acceptance is permitted whether the part of the goods accepted conforms or not. The only limitation on partial acceptance is that good faith and commercial reasonableness must be used to avoid undue impairment of the value of the remaining portion of the goods. This is the reason for the insistence on the 'commercial unit' in paragraph (c). In this respect, the test is not only what unit has been the basis of contract, but whether the partial acceptance produces so materially adverse an effect on the remainder as to constitute bad faith."
9.90 Under
section 2-105,
"'commercial unit' means:
such a unit of goods as by commercial usage is a single whole for purposes of sale and division of which materially impairs its character or value on the market or in use. A commercial unit may be a single article (as a machine) or a set of articles (as a suite of furniture or an assortment of sizes) or a quantity (as a bale, gross, or carload) or any other unit treated in use or in the relevant market as a single whole."
9.91 In
England and Wales, the position was originally similar to that in Hong Kong.
The Sale and Supply of Goods Act 1994 prompted by the Law Commission's
report[548] provides for buyers to
have a general right of partial rejection by adding a new section 35A to the
1979 Act. Section 35A provides as follows:
"(1) If the buyer –
(a) has the right to reject the goods by reason of a breach on the part of the seller that affect some or all of them, but
(b) accepts some of the goods, including, where there are any goods unaffected by the breach, all such goods,
he does not by accepting them lose his right to reject the rest.
(2) In the case of a buyer having the right to reject an instalment of goods, subsection (1) above applies as if references to the goods were references to the goods comprised in the instalment.
(3) For the purposes of subsection (1) above, goods are affected by a breach if by reason of the breach they are not in conformity with the contract.
(4) This section applies unless a contrary intention appears in, or is to be implied from, the contract."
9.92 The
right of partial rejection under section 35A is general in the sense that it
covers all types of non-conformity, not just goods of different description. As
before, a buyer can choose to reject or accept all the contract goods.
Alternatively, he can accept the conforming goods, and can choose either to
reject all or any of the non-conforming goods. He will only have a right to
reject part of the contract goods if he has a right to reject the whole. If he
chooses to accept any conforming goods, he must retain all and not just some of
them.
9.93 The Law Commission considered the Uniform Commercial Code in its
report before making their recommendations. The Consultation Paper discussed the
similarities and differences between the American and English provisions and
made recommendations accordingly. We discuss these similarities and differences
in the following paragraphs. First, in both jurisdictions, buyers have a
general right of partial rejection whether or not the contract is severable,
covering all types of non-conformity not just goods of different description.
Professor Michael Bridge has mentioned:
"Partial acceptance will often make good commercial sense and can be seen at work already in the cases where the parties have voluntarily agreed upon it. It can often be the solution that minimizes the losses caused by the tender of non-conforming goods."[549]
9.94 Secondly,
the English provisions have adopted the American concept and definition of
"commercial unit" in the Uniform Commercial Code to limit a buyer's right of
partial rejection. This limitation is sensible so as not to impair the value
and character of the goods which have to be used as part of a unit such as a
pair of shoes or a pair of gloves. In such cases, buyers should not be entitled
to reject non-conforming goods forming part of a commercial unit and retain the
conforming ones. Professor Atiyah has said:
"There seemed to be no sound reason of commercial policy for refusing to allow the buyer to accept part and reject part of the goods delivered, whether or not the contract is severable in the technical sense, provided only that the goods constituted different 'commercial units'. ... All this will simplify the law in a number of respects. In general it means that the question of acceptance will only arise with respect to the very goods accepted, other goods under the same contract not being affected - except in the one, rather obvious, case where the goods are all part of one commercial unit. Obviously, if a buyer buys one commercial unit, he cannot accept part and reject part."[550]
9.95 The
Consultation Paper took the view that giving buyers rights of partial rejection
should alleviate the problems brought about by the stringent rule in section
13(3) and the narrow exception in section 32(3) of Cap 26. Almost all those who
have commented on this were in support, including the Chinese
Manufacturers’ Association of Hong Kong, the Chinese General Chamber of
Commerce, the Assistant Legal Counsel of Park 'n' Shop and the Consumer Council.
The Director of Government Supplies summarises the supporting views
well:
“[it] provides better protection to both buyer and seller as partial acceptance will often make good commercial sense. It is reasonable and sensible to allow buyers to be able to reject only the non-conforming goods and accept the rest. The all-or-nothing approach not only deprives buyers of choices, but also may not necessarily be in the sellers' interest.”
We
accordingly recommend that buyers should have a general right of partial
rejection, whether or not the contract is severable, covering all types of
non-conformity subject to an exception in respect of goods forming part of a
"commercial unit".
9.96 Thirdly, in both jurisdictions, buyers can reject
all or some of the non-conforming goods. This provision makes some practical
and commercial sense. There is no point in compelling a buyer to reject all the
non-conforming goods if he chooses to accept some of them. The extent of
non-conformity can vary from one item to another, and this means that a buyer
can probably find some use for some of the non-conforming goods. If he chooses
to do so, as pointed out by the Law
Commission,[551] he should be
encouraged to do so and should not be compelled to reject goods which he wishes
to accept despite the non-conformity. We therefore recommend that in exercising
his right of partial rejection, a buyer should be able to reject all or some of
the non-conforming goods.
9.97 Fourthly, both the American and English
provisions provide that the right of partial rejection is subject to contrary
intention. Given the weaker bargaining power of consumers and the common use of
standard term contracts unilaterally imposed by sellers, the right of partial
rejection can easily be contracted out. It may be possible to argue that Cap 71
controls the exclusion of a consumer's right of partial
rejection.[552] Under section
8(2)(a)[553] of Cap 71, a seller
cannot, as against a consumer, or where the contract is on the seller's written
standard terms of business, by reference to any contract term, exclude or
restrict any liability except if that contract term is reasonable. Section
5(1)(b)[554] extends this to cover
exclusion or restriction of any right or remedy in respect of
liability.
9.98 There is doubt as to whether section 5(1)(b) of Cap 71
covers a "right" which is expressly made subject to contrary intention.
Moreover, even if Cap 71 is applicable, an ordinary consumer may have great
difficulty in ascertaining whether or not the contracting out provision
satisfies the "reasonableness" test before deciding whether to exercise his
right of partial rejection. For the sake of certainty and better protection for
consumers, the Consultation Paper recommended that the legislation should spell
out expressly that in the case of consumers, the parties could not contract out
of the right of partial rejection. One of our Sub-committee members has
expressed the view that in the case of a non-consumer who deals on a
seller’s standard term contract, any contracting out provision on the
right of partial rejection should only be valid if it satisfies the
"reasonableness" test. This would be in line with the spirit of Cap 71 as
enshrined in section 8(1). The Consultation Paper sought views, comments and
suggestions on this issue generally, especially from suppliers and commercial
buyers. The only comment we have received is from Professor Hugh Beale, who is
of the opinion that a provision excluding the right of partial rejection should
amount to a restriction or exclusion of a right within the terms of Cap 71. We
are of the view that non-consumers are usually in a better position than
consumers to bargain with sellers, and the right to reject all the goods should
already give them adequate protection. We therefore recommend that, except in
the case of consumers, the right of partial rejection should be subject to
contrary intention made in or implied from the contract.
9.99 On
comparison, there are also a number of differences between the American and
English provisions. The English provisions provide for some matters expressly,
for which the American provisions do not. First, the English provisions have
made it express that a buyer must have the right to reject the whole before he
can have a right of partial rejection. There is particular value in making this
express in view of the recommendation in Chapter 7 concerning restriction on
non-consumers' rights to rejection. If a non-consumer buyer loses his right of
rejection in general, he will not have the right of partial rejection. We
therefore recommend that a buyer must be entitled to reject the whole before he
can have a right of partial rejection.
9.100 Secondly, under the English
provisions, if a buyer chooses to accept any conforming goods, he must accept
all and not just some of them, while under the American provisions he may choose
to accept only some of the conforming goods. Some members of our Sub-committee
prefer the American approach and observe that giving a buyer a right to accept
only part of the conforming goods may also benefit the seller since instead of
losing the entire deal, the seller will at least sell some of the conforming
goods to the buyer who is entitled to reject all the goods. They are also of
the view that if a buyer has contracted for a specific quantity of goods and
that quantity cannot be supplied in its entirety, the buyer may wish to adjust
his needs and may then require only a quantity smaller than that of the
conforming goods. The Consumer Council favours this opinion and
observes:
“[A] consumer should be given the option to accept only some of the conforming goods in exercising his right of partial rejection under the proposed provision. [A] consumer buys the quantity he needs or wants. The shortfall resulting from the non-conformity may change his plan of using the goods. He may require a quantity smaller than that of the conforming goods. If the consumer is bound to opt either to reject or accept all of the conforming goods, he would be forced to give up his plan of using the goods or to accept more than he actually requires. Both situations are not commercially sound. Moreover, it is unfair to the consumer.”
9.101 After
extensive deliberation, we prefer the English provisions. As a matter of
principle, buyers should not be given the choice as to the quantity of the
conforming goods which they wish to accept, since these already conform to the
contract. To do otherwise would amount to rewriting the contract and would be
unfair to sellers, especially when buyers reject some of the conforming goods
because of extrinsic reasons such as changes in the market. The Consumer
Council’s concern has already been dealt with in the English approach
since a buyer can always negotiate with the seller if the buyer intends to
accept only part of the conforming goods. There is nothing in the English
approach which prevents the parties from re-negotiating and re-structuring the
deal. By contrast, if a buyer is given a unilateral statutory right to retain
some of conforming goods without the need to re-negotiate with the seller, he
may benefit from the discounted price which may only be available for the
original quantity of the contract. The buyer already has stronger bargaining
power since he can always choose to reject all of the goods. We believe that
the right to reject all the goods should provide adequate protection to buyers,
and do not think there is a need to give buyers statutory rights to choose the
quantity of the conforming goods to be rejected. We therefore favour the
English approach.
9.102 Thirdly, the definition of "commercial unit" in
the 1979 Act is based on that in its American counterpart, but the English
provision omits the reference to "a unit of goods as by commercial usage is a
single whole for purposes of sale". The Law Commission has recommended
adopting the concept of "commercial unit" used in the United States Uniform
Commercial Code.[555] After
pointing out that the 1979 Act has not adopted the definition in the Uniform
Commercial Code in full, Nicholas Hamblen has observed that "trade practice
and usage is likely to be an important factor in determining what is or is not
to be regarded as a 'commercial
unit'."[556] We are of view
that commercial usage should be useful in deciding what is a "commercial unit".
The Law Commission has also referred to it when explaining the concept of
"commercial unit" with
examples.[557] We therefore
recommend that the definition of "commercial unit" in section 2-105 be
adopted.
9.103 Fourthly, the English provisions expressly state that
where a sale is by instalments, the right of partial rejection will apply to
each instalment. Professor Bridge has pointed out that the "existence
of severable rejection rights is implicit in section 35A(2) which permits the
buyer to accept only a part of a non-conforming instalment and reject the
rest."[558] We find it
helpful for the avoidance of doubt to make it clear that the rights of partial
rejection apply to each instalment and we so recommend.
9.104 With the
enactment of the recommended general right of partial rejection, the limited
right of partial rejection in section 32(3) of Cap 26 just covering goods of
different description would become redundant and should be repealed
consequentially. We recommend repealing section 32(3).
|
Recommendation 25
We recommend repealing section 32(3) of Cap 26, and that provisions on a
right of partial rejection similar to those in section 35A of the 1979 Act
should be made in Cap 26, namely:
(a) subject to (b) below, where a buyer has a right to reject because of
a breach by the seller which affects some or all the goods, and has accepted
some of the goods including all the goods unaffected by the breach, he can still
reject the rest of the goods, and in the case of consumers, the application of
this paragraph cannot be excluded or restricted by reference to any contract
terms; and in case of non-consumers, such a right should be subject to a
contrary intention made in or implied from the contract;
(b) a buyer accepting any goods in a commercial unit is deemed to have
accepted all the goods making the unit; and "commercial unit" means such a unit
of goods as by commercial usage is a single whole for purposes of sale and
division of which materially impairs its character or value on the market or in
use;
(c) where a buyer has a right to reject an instalment of goods, the
principles in (a), (b) and (d) also apply as if references to the goods were
references to the goods comprised in the instalment;
(d) goods are affected by a breach if they do not conform to the
contract.
|
9.105 Section 24 of Cap
26[559] provides for an exception
to the basic principle of sales law expressed in the Latin maxim nemo dat
quod non habet rule,[560] and
reads as follows:
"Where goods are openly sold in a shop or market in Hong Kong, in the ordinary course of the business of such shop or market, the buyer acquires a good title to the goods, provided he buys them in good faith and without notice of any defect or want of title on the part of the seller."
9.106 Cap
26 has not defined the term "shop" and it is a question of fact for each case to
determine what is a shop. According to Au Muk Shun v Choi Chuen
Yau,[561] there are four
conditions to fulfil before the section applies, namely:
(a) the goods must be openly sold;
(b) the sale must take place in a shop or market;
(c) the purchaser must act in good faith and without any notice of any defect of title; and
(d) the sale must be in the ordinary course of business of that shop or market.
9.107 The
section is modelled on the
repealed[562] section 22 of the
1979 Act which reflected the common law position before its enactment. Sir Roy
Goode has given a clear account of the historical background of the market overt
rule:
"The market overt rule, which now appears to be peculiar to English law, originated in the days when shops were few, most goods were bought and sold at markets and fairs, and private sales were severely discouraged as being likely to involve stolen goods. One who received stolen goods and was not able to show that he had acquired them in open market stood in considerable danger of being hanged. The owner, for his part, was expected to look for his goods in the market; and if he did not intervene at the market prior to the sale of the goods, the bona fide buyer was given an assurance of good title."[563]
9.108 Section
22 of the 1979 Act only applied to a sale in a market overt as defined in court
cases. The sale had to be made in an "open public and legally constituted
market".[564] To be legally
constituted, where a market was outside the City of London, it had to be
established by grant, prescription or
statute.[565] If a market was
within the City, by custom of the city it was legally constituted if it was on
the ground floor and open to the street and the goods were openly
displayed.[566] In addition, the
entire sale had to take place in the market between the hours of sunrise and
sunset.[567]
9.109 In
contrast, section 24 of Cap 26 covers all shops and markets selling in the
ordinary course of their business. Section 24 is therefore wider in
scope.
9.110 We take this opportunity to examine whether Hong Kong should
retain this age-old rule in our statute book. We first discuss the provisions
in other jurisdictions and then the opinions of academics.
9.111 In Australia, the principal legislation regulating sale of goods
transaction is the uniform legislation in force in each State and Territory: the
Sale of Goods Act[568] which is
modelled on the English Sale of Goods Act 1893. For the purpose of discussion,
we will focus on the Sale of Goods Act 1923 in New South Wales (the "1923
Act").
9.112 Although the 1923 Act, like other Sale of Goods Acts in
other States and Territories, is modelled on the English 1893 Act, there is no
provision equivalent to section 22 of the 1979 Act. On the contrary, section
4(2) of the 1923 Act makes it express that the common law market overt rule does
not apply in New South Wales. Section 4(2) provides as follows:
"The rules of the common law, including the law merchant, save in so far as they are inconsistent with the express provisions of this Act, and in particular the rules relating to the law of principal and agent, and the effect of fraud, misrepresentation, duress, or coercion, mistake, or other invalidating cause, shall continue to apply to contracts for the sale of goods, provided that there shall not be deemed to be or to have been any market overt in New South Wales."
9.113 In
Canada, provincial law basically regulates the law relating to sale of goods.
Each common law province has its own Sale of Goods
Act[569] which is also modelled on
the English Sale of Goods Act 1893. We will single out the Sale of Goods Act
1990 in Ontario for discussion purposes. Similar to Australia, the 1990 Act
provides expressly that the "law relating to market overt does not apply to a
sale of goods that takes place in
Ontario".[570]
9.114 In
England, section 22 on which section 24 of Cap 26 was modelled was repealed by
the Sale of Goods (Amendment) Act 1994. Furthermore, the Sale of Goods Act 1908
in New Zealand, modelled on the English Sale of Goods Act 1893, also spells out
that the "law relating to market overt shall not apply in New
Zealand."[571]
9.115 All major jurisdictions in the common law world have either
abolished or rejected at the outset the market overt rule. Not surprisingly,
academics have criticised this rule. Professor Atiyah has pointed out,
"[t]his exception could be explained, but scarcely justified, on historical
grounds only, and it may be regretted that it was included in the 1893
codification."[572] Sir Roy
Goode has put it even more strongly, "[t]he market overt rule has little to
commend it, and should be abolished at the earliest
opportunity."[573]
9.116 The
theory underlying the market overt rule is that an owner is expected to be able
to find his lost goods in the market place. We are of the view that while the
market overt rule may have worked well in the Middle Ages, it is inappropriate
to modern conditions. This is even more so for section 24, which is wider than
its English equivalent, since it applies to sale in "a shop or market in Hong
Kong" and not just "market overt" as restrictively defined in court cases. It
is unrealistic to expect an owner to be able to find his lost goods by searching
the shops and markets of Hong Kong. As early as 1956, Professor E Ivamy
said:
"It may be said that a sale in market overt in the country where goods are exposed for sale on stalls gives the real owner some opportunity of being able to track down his property before it is sold. But can the same be said of a sale in a retail shop? ... In the old days it might have been possible for an owner to trace his property, for he would be able to go to those shops which specialised in the sale of goods similar to his own, but this is now less likely in the era of departmental stores which deal in great varieties of goods."[574]
9.117 Professor
Geraint Howells also echoes this view and has said:
"... in former times, when goods were not so easily transported, a person who had goods stolen from him could be expected to search the markets for them and if he failed to discover them it would be unfair to allow him to reclaim them from an innocent purchaser, who bought them at a public market. This was perhaps never very fair, but of course is less so nowadays when thieves can easily dispose of goods at the other end of the country. This, combined with the fears of a thief's paradise created by the explosion of car boot sales, explains why abolishing the rule was seen as desirable."[575]
9.118 If
the market overt rule is repealed, a further question is whether a new rule
should be provided to replace it. Professor Howells has said, "abolition of
the market overt rule by itself is only a partial solution to the problems which
are encountered in this area of the
law".[576] The Law Reform
Committee of England and Wales proposed replacing the market overt rule with
another rule: passing good title to innocent retail buyers purchasing in good
faith at trade premises or public
auctions.[577] This
recommendation contained in the report issued in 1966 has yet to be implemented.
Professor Diamond[578] has
proposed replacing the market overt rule with a new principle that where an
owner has entrusted the goods to, or acquiesced in their possession by, another
person, a disposition by that person would pass good title to innocent
purchasers. Furthermore, the Department of Trade and Industry of the United
Kingdom in 1994 issued a consultation
paper[579] proposing reform along
the lines advocated by Professor Diamond. As the consultation has shown no
consensus,[580] this proposal has
not been implemented. On responding to the question as to why all these
proposals have not been implemented, Professor Hugh Beale has said:
"I am not aware of the reasons for non-implementation of these proposals in any detail. The Law Reform Committee's paper was felt to be inadequate, and even more so the DTI's. Another reason for rejection of the LRC's proposal was, I believe, the fear that it would make it easier to fence stolen goods. I think the main reason for Diamond's and the DTI's being ignored is that they were seen as connected to the question of security over personal property (the main focus of the Diamond report) and there was industry opposition to making changes on the scale Diamond wanted – things were felt to work well enough. As you know, all we have done is to go in the opposite direction by abolishing market overt...".[581]
9.119 The
Chinese Manufacturers’ Association of Hong Kong strongly supports the
abolition of the market overt rule, and agrees with the observation that an
owner is more vulnerable than a buyer. The Association further observes that it
would be technically difficult to distinguish between an innocent buyer and one
who intentionally exploits the loophole of the existing law. On the other hand,
the Consumer Council argues that not every innocent purchaser will benefit from
the protection of the market overt rule. In order to be covered by the rule, he
has to satisfy the conditions set out in the Au Muk Shun case discussed
above. The Consumer Council argues further:
“[T]he Consultation Paper rightly points out that a balance has to be struck between protecting innocent purchasers and innocent owners... It is our view that the balance must be fair. ...Under the market overt rule, there is in effect a balance between the interests of the innocent purchasers and innocent owners. The abolition of the rule would totally upset the balance. Modern development of sale may justify redressing the balance and should not warrant a total disruption of it."
We
appreciate the Consumer Council’s concern but consider that it is
reasonable to tilt the balance in favour of the innocent owner. The market
overt rule is, in modern urban conditions, an anachronism which unreasonably
penalises the innocent owner. In practice, for the reasons set out below the
buyer is better placed to avoid the difficulties associated with the purchase of
goods without good title.
9.120 The Chartered Institute of Purchasing
& Supply accepts that the underlying theory of the existing law that a true
owner can find his lost goods in the market may not be realistic, but also
considers that the new law would add a new burden to purchasers to ascertain the
true ownership of the goods. We are of the view that, compared with requiring
an owner to search for his lost goods, a requirement that a buyer be more
cautious when acquiring goods is considerably less burdensome. We explain this
further in the following paragraphs.
9.121 One member of our
Sub-committee has mentioned that the obsolescence of the market overt rule does
not negate the need to protect innocent buyers of stolen goods, and section 24
should not be repealed unless there is a replacement. After extensive
deliberations, we recommend abolishing the market overt rule with no replacement
for the following reasons. First, the rationale of any replacement rule is to
protect innocent purchasers. However, we have to strike a balance between
protecting innocent purchasers and innocent owners. As Professor Howells has
observed:
"The motivation for [abolishing the market overt rule] was the belief that the [rule] allowed markets to be used as a place for stolen goods to be sold in a way which defeated the claim of the true owners."[582]
9.122 We
believe that as between an innocent buyer and an equally innocent owner, an
owner is more vulnerable. A buyer can protect himself by inquiring as to the
source of the goods, going to more reputable shops, etc. It could be argued
that an owner can also protect himself by taking precautions against burglary
and robbery, but sometimes burglary and robbery cannot be prevented no matter
how cautious an owner is. An owner is in a more passive position than a buyer,
who can take a more active role to protect himself. Moreover, if the goods have
special meaning for an owner, loss of the goods may involve sentimental
elements, quite apart from any pecuniary loss. On the contrary, if a buyer is
required to return the stolen goods to the owner, the buyer can claim against
the seller since there is a breach of the implied condition on
title.
9.123 Secondly, there are already a number of exceptions to the
nemo dat rule in sections 23 to 27 of Cap 26 to protect deserving
innocent purchasers. A Sub-committee member is of the view that these sections
do not specifically protect innocent buyers of stolen goods, and repealing
section 24 without replacement will leave a vacuum in this area. We find that
owners are in a less favourable position. The Pawnbrokers Ordinance (Cap 166)
has provided some protection against the disposal of stolen
goods,[583] but Cap 166 applies
only in the context of pawning goods, and not to other kinds of disposal of
stolen goods in markets or shops. The protection provided by Cap 166 is
therefore limited. Thirdly, all major common law jurisdictions have either
abolished or rejected the market overt rule without replacing it.
Recommendation 26 |
9.124 Section 32 of Cap 26 provides for buyers' remedies for delivery
of wrong quantity and reads as follows:
"(1) Where the seller delivers to the buyer a quantity of goods less than he contracted to sell, the buyer may reject them, but if the buyer accepts the goods so delivered, he must pay for them at the contract rate.
(2) Where the seller delivers to the buyer a quantity of goods larger than he contracted to sell, the buyer may accept the goods included in the contract and reject the rest, or he may reject the whole. If the buyer accepts the whole of the goods so delivered he must pay for them at the contract rate.
(3) Where the seller delivers to the buyer the goods he contracted to sell mixed with goods of a different description not included in the contract the buyer may accept the goods which are in accordance with the contract and reject the rest, or he may reject the whole.
(4) The provisions of this section are subject to any usage of trade, special agreement, or course of dealing between the parties."
9.125 Under
section 32(1), where a seller delivers less than the contract quantity to a
buyer, the buyer may reject the goods. Similarly, under section 32(2), a buyer
may also reject the whole of the goods if what are delivered are more than the
contract quantity. This right of rejection is, however, subject to some
restrictions, expressed in the Latin phrase: de minimis non curat lex
(the law pays no attention to trifles). Where a long or short delivery is
"microscopic"[584] and is not
capable of influencing a buyer's
mind,[585] he cannot reject the
goods. The court will decline the right of rejection if the difference in
quantity is merely trivial, such as an excess of 55 lbs of wheat over the
contract quantity of 4,950
tons.[586]
9.126 In Chapter
7, we recommend restricting non-consumers' rights of rejection on sellers'
slight breaches of the statutory implied terms (sections 14 to 17) for contracts
of sale of goods. The question is whether there should be such restrictions on
buyers' rights of rejection on delivery of a wrong quantity.
9.127 In
England, with the introduction of section 15A into the 1979 Act on restricting
non-consumers' right to reject on sellers' slight breaches of the statutory
implied terms (sections 12 to 15), new section 30(2A) and (2B) of the 1979
Act was also enacted to restrict non-consumers' rights of rejection on delivery
of a wrong quantity. The relevant extracts of section 30, on which section 32
of Cap 26 is modelled, provide as follows:
"(1) Where the seller delivers to the buyer a quantity of goods less than he contracted to sell, the buyer may reject them, but if the buyer accepts the goods so delivered he must pay for them at the contract rate.
(2) Where the seller delivers to the buyer a quantity of goods larger than he contracted to sell, the buyer may accept the goods included in the contract and reject the rest, or he may reject the whole.
(2A) A buyer who does not deal as consumer may not –
(a) where the seller delivers a quantity of goods less than he contracted to sell, reject the goods under subsection (1) above, or
(b) where the seller delivers a quantity of goods larger than he contracted to sell, reject the whole under subsection (2) above,
if the shortfall or, as the case may be, excess is so slight that it would be unreasonable for him to do so.
(2B) It is for the seller to show that a shortfall or excess fell within subsection (2A) above."
9.128 The
Consultation Paper recommended adopting section 30 (2A) and (2B) of the 1979
Act, which restrict non-consumers’ rights of rejection on the delivery of
a quantity which is slightly wrong. Professor Michael Bridge is of the view
that the new section 30(2A) and (2B) does not add much to the de minimis
maxim. He has said:
"It is uncertain what the new section 30(2A) adds to the de minimis maxim; it prevents the rejection of a short tender by a non-consumer buyer where the shortfall is slight and rejection would be unreasonable. It must add something since, unlike the de minimis maxim, it does not apply to consumer buyers, but it is unlikely to add very much. ... Further, section 30 (2A) prevents a non-consumer buyer from rejecting the goods where the surplus where it is slight and rejection would be unreasonable. As in the case of short delivery, it is unclear what this provision adds to the de minimis maxim."[587]
The
Director of Government Supplies considers that the recommendation does not work
in favour of organisational buyers. In some cases, such as the procurement of
specially designed furniture or equipment, or a network of hardware and software
for a group of users, short delivery could pose a problem to an organisation.
When the price of the contract items goes up, the seller may choose to short
deliver a certain quantity in order to minimise his "loss". As there is no
fault on the part of the buyer, it is unreasonable to force him to accept a
quantity which is short of his needs. The Director of Government Supplies
therefore suggests withdrawing the entire recommendation, or at least the part
on short delivery.
9.129 In response, we would point out that our
recommendation would allow the buyer to reject the goods if the short delivery
of the contractual goods causes him problems. On the other hand, if the
shortfall is only trivial and does not affect a buyer’s interests, our
recommendation would prevent the buyer from taking advantage of the slight
shortfall to reject the goods. Our recommendation only limits the rights to
reject in the case of a shortfall which is "slight" and where it is unreasonable
for a buyer to reject.
9.130 The Assistant Legal Counsel of Park
‘n’ Shop comment