Contracts for the supply of goods - [2002] HKLRC 2 (February 2002) - The Law Reform Commission of Hong Kong Report - Contracts For The Supply of Goods - Chapter 9 - Miscellaneous amendments concerning contracts for the sale of goods

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:

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.

Sale of goods forming part of a bulk

Problems of the existing law

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.

Experience in other jurisdictions

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:

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:

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:

Conclusion

Options

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:

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:

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]

In favour of option (d)

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:

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:

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:

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.

(a) conditions for sections 20A and B to apply

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.

(b) buyers of the bulk as co-owners

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).

(c) special provisions to facilitate normal trading and regulate obligations among co-owners

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:

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.

(d) preserving buyers' contractual rights

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:

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.

(e) application to international sales

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:

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:

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:

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:

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:

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.

(f) risk

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:

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:

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:

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;

- affect any arrangement on adjustments among buyers themselves;

- affect any buyer's rights under his contract;

(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.

Extending the definitions of "goods" and "specific goods" to cover undivided shares of goods

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.

Rights of partial rejection

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:

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:

Experience in other jurisdictions

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:

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:

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:

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.

Conclusion

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:

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:

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:

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:

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.

Statutory exception to the nemo dat rule : sale in market overt

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:

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:

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:

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.

Experience in other jurisdictions

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:

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]

Conclusion

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:

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:

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:

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:

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.

Remedies for delivery of wrong quantity

9.124 Section 32 of Cap 26 provides for buyers' remedies for delivery of wrong quantity and reads as follows:

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:

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:

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

	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

Hong Kong Law Reform Commission

Chapter 9 - Miscellaneous amendments concerning contracts for the sale of goods

Overview

Sale of goods forming part of a bulk

Problems of the existing law

Experience in other jurisdictions

Conclusion

Options

In favour of option (d)

(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

Extending the definitions of "goods" and "specific goods" to cover undivided shares of goods

Rights of partial rejection

Experience in other jurisdictions

Conclusion

Statutory exception to the nemo dat rule : sale in market overt

Experience in other jurisdictions

Conclusion

Remedies for delivery of wrong quantity