BRIEFING PAPER Number 9036, 30 October 2020 Consumer sales : By Lorraine Conway

rules on the transfer of ownership of goods

Contents: 1. Introduction 2. Current : when is a consumer formed? 3. Current transfer of ownership rules 4. Consultations on reform of transfer of ownership rules 5. ’s draft Bill 6. Next steps

www.parliament.uk/commons-library | intranet.parliament.uk/commons-library | [email protected] | @commonslibrary 2 Consumer sales contracts: rules on the transfer of ownership of goods

Contents

Summary 3 1. Introduction 5 1.1 Nature of the problem 5 1.2 The policy rationale for the draft Bill 5 1.3 Coronavirus has created a new sense of urgency 6 2. Current law: when is a consumer contract formed? 8 2.1 When is a sales contract formed? 8 2.2 How do terms and conditions delay formation of a sale contract? 8 2.3 Why delay the formation of the contract? 9 2.4 Possible consumer detriment 9 3. Current transfer of ownership rules 11 3.1 Specific goods 11 3.2 Unascertained or future goods 12 3.3 Goods forming part of a bulk 14 4. Consultations on reform of transfer of ownership rules 16 4.1 Law Commission consultation - June 2015 16 4.2 Law Commission’s Final Report - July 2016 16 4.3 Current Law Commission consultation & draft Bill – July 2020 17 5. Law Commission’s draft Bill 19 5.1 Scope of the proposed new rules 19 5.2 New modern terminology 20 5.3 “Goods identified and agreed” (currently referred to as specific goods) 20 5.4 “Goods not identified and agreed upon” (currently referred to as unascertained goods) 21 5.5 Rules to be mandatory 23 5.6 Goods forming part of a bulk 24 5.7 Transfer of risk 26 5.8 Insolvency and the operation of the proposed transfer of ownership rules 26 6. Next steps 28

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3 Commons Library Briefing, 30 October 2020

Summary

Consumers often pay for goods in advance of receiving them, for instance, when buying online, ordering an item of furniture in a shop, or buying a gift voucher. If a retailer goes into insolvency before the goods have been delivered, the consumer is left unsure as to whether they will still receive the goods they have paid for. This would depend on whether ownership of the goods has passed to the consumer, which is determined by the transfer of ownership rules. The current rules are contained in the Sale of Goods 1979 and are substantially the same as those in the original 1893. The rules are complex, technical and rely on outdated language. Unsurprisingly, consumers find the rules difficult to understand. When a is formed (i.e. the timing of the contract) impacts directly on the transfer of ownership rules. This is because the rules are premised on the existence of a contract. Retailers, particularly online retailers, commonly seek to delay formation of a consumer contract until the goods are dispatched, or in some cases delivered, to the consumer. This practice has significant implications for the transfer of ownership: if the contract does not come into existence until dispatch, then there can be no transfer of ownership until dispatch. In September 2014, the Department for Business, Innovation and Skills (now the Department for Business, Energy & Industrial Strategy) asked the Law Commission to examine the protections given to consumer prepayments and to consider whether such protections should be strengthened. The Law Commission issued a consultation during the summer of 2015 and published its Final Report, “Consumer Prepayments on Retailer Insolvency”, on 13 July 2016. The Law Commission made several recommendations, including reform of the transfer of ownership rules. In preparing its report the Law Commission considered a variety of prepayments made by consumers in advance of goods and services being provided, including Christmas savings schemes, customer deposits for goods and the purchase of gift vouchers, as well as prepayments for furniture or home improvement projects which require upfront payment for retailers to order from suppliers. The Government published its response in December 2018. The Government had already published “Modernising consumer markets: Consumer Green Paper” in April 2018 to examine markets which were not working fairly for consumers, in particular, digital markets. A spate of retail insolvencies had left consumers without the goods they had paid for online. The Government said that the findings of the Green Paper would be considered alongside the Law Commission’s work, particularly as regards possible legislative changes. On 27 July 2020, the Law commission published its consultation paper, “Consumer sales contracts: transfer of ownership”, containing draft legislation. If enacted, the reforms contained in the draft Bill would modernise and simplify the rules on when consumers acquire ownership of goods, including where they have ordered goods online or where a retailer goes insolvent before they have received the goods. The consultation closes on 31 October 2020. The Law Commission believes that problems with consumer prepayments have become more urgent owing to the significant increase in online shopping prompted by the Covid- 19 pandemic, which has also increased the risk of retailer insolvencies. It thinks it is time for the transfer of ownership rules to be modernised “so that consumers have clarity on their rights of ownership, especially in an insolvency situation”. 4 Consumer sales contracts: rules on the transfer of ownership of goods

This Commons briefing paper, section 2, considers the formation of sale of goods contracts between consumers and traders. The current rules on transfer of ownership are outlined in section 3. It summarises the background to the Law Commission’s consultation (section 4) and the main provisions of draft Bill (section 5). In the process, it also considers how the question of ownership of goods in a sales contract would be determined under the draft Bill in the event of the retailer’s insolvency.

5 Commons Library Briefing, 30 October 2020

1. Introduction

The rules governing transfer of ownership were first developed for commercial contracts and codified in statute in 1893.1 Since then, they have been restated in the (SGA 1979) but not changed in their substance. Additional provisions were introduced in 1995 for goods forming part of a bulk (see section 3.3 below). Although these apply to all sales contracts, including with consumers, they were developed with commodity trading in mind.

1.1 Nature of the problem It is not unusual for consumers to pay for goods in advance of receiving them, for example, when buying online. In some cases, an advanced payment is necessary before a bespoke item can be made (such as a new sofa). Another example of an advance payment is where a consumer selects a specific good in-store, pays for it, but leaves it with the retailer for alteration (e.g. an expensive suit).Consumers might also make an advance payment by way of a deposit on a major purchase (such as cars or new kitchens). Gift vouchers and cards are another type of advance payment. The difficulty is when an advance prepayment is made, and the retailer goes into insolvency before the goods are received. The consumer is left uncertain as to whether they are entitled to receive the ordered goods. Legally, this would depend on whether ownership of those goods has transferred to the consumer. The current rules on transfer of ownership are contained in the SGA 1979. It is the insolvency practitioner who applies the rules and determines who owns the goods. If it is determined that ownership has not passed then, as an unsecured creditor, the consumer may be left with neither the item they paid for nor any real prospect of a refund. Insolvency legislation sets a hierarchy of creditors. Those who rank as unsecured creditors are very near the bottom of the list for repayment; they often receive only a few pence in the pound or nothing at all. To make matters worse, the Law Commission thinks that many consumers are unaware of their legal position. According to the Law Commission, the rules are complex, technical and outdated: Some of the terminology is old-fashioned and unclear and the rules were not designed with consumer transactions or internet shopping in mind. As a result, the rules can leave consumers confused and questioning why they cannot claim the goods they have ordered, and out of pocket if a retailer becomes insolvent after they have paid but before they receive the goods.2 In its 2016 Final Report, the Law Commission made a number of recommendations to increase the protection of consumers who had paid retailers in advance but had not received the goods at the point of the retailer’s insolvency. One recommendation was to reform the rules that apply to the transfer of ownership of goods.

1.2 The policy rationale for the draft Bill A draft Bill to reform the transfer of goods rules can be found at Appendix 2 of the Law commission’s July 2020 consultation paper, “Consumer sales contracts: transfer of ownership”. The consultation closes on 31 October 2020.

1 The original 2 Consultation to update Victorian-era transfer of ownership rules”, Law Commission website, 27 July 2020, [online] (accessed 20 October 2020) 6 Consumer sales contracts: rules on the transfer of ownership of goods

The general consensus is that the (CRA 2015) has gone a long way towards achieving the objective that the law on consumer sales should be written in plain language and brought together in one place, so that it is readily accessible to both consumers and retailers. However, the Act does not include updated rules on when ownership of goods is transferred under a sales contracts; the rules are still contained in the SGA 1979. Further, “the current rules appear inconsistent with consumers’ reasonable expectations of when they will become the owners of goods they have paid for."3 The Law Commission recommended in its 2016 Final Report that the CRA 2015 should be amended to include clear rules on transfer of ownership, and sit alongside other rules concerning the retailer/consumer relationship. It recommended that these rules should be mandatory, that is, any term in the contract which would put the consumer in a worse position should be of no effect. It explained the policy rationale as follows: The case histories we received from Citizens Advice in response to the 2015 Consultation showed that issues of ownership are sometimes a real concern to consumers. We think consumers deserve a clear statement of the law in modern terms about when they do (or do not) own goods left with an insolvent retailer. Clearer and updated statutory rules would also benefit insolvency practitioners and shop staff.4 If enacted, the draft Bill would modernise the transfer of ownership rules. It would ensure that the rules are easier to follow so consumers understand what their rights of ownership are.

1.3 Coronavirus has created a new sense of urgency The Law Commission believes that reform of the transfer of ownership rules had become urgent with the outbreak of Covid-19: “The scale at which consumers are purchasing and prepaying for unascertained goods from online retailers has therefore increased dramatically. Consumers deserve to have a set of clear rules which reflect the reality of how they buy goods in the 21st century so that they can make online purchases with confidence.”5 The pandemic has changed shopping habits; more people are shopping online, paying for goods before receiving them. At the same time, there has been a marked increase in the number of retailer insolvencies. Last year (2019) saw the highest number of retailer insolvencies in five years and the Centre for Retail Research forecasts that owing to Covid- 19, store closures will increase by 25% in 2020 over 2019 levels.6 The Law Commission summarises the position as follows: Internet sales have grown steadily over the last few years, with a sharp increase in recent months amid the closure of non-essential retail outlets in response to coronavirus. The last few months have seen internet sales jump from 19.9% of all retail sales in January 2020 to 32.8% in May 2020. […] 5.3 In recent years, the number of retailer insolvencies has been increasing. In October 2019, the Insolvency Service reported 1,252 insolvencies in the retail sector over the previous year. This was the highest number of retailer insolvencies in five years. Retailers operating from physical stores on the high street have been especially affected, due to falling consumer demand as consumers increasingly purchase goods

3 Law Commission, “Consumer Prepayments on Retailer Insolvency”, Law Com No 368, para. 9.53, 13 July 2016, [online] (accessed 20 October 2020) 4 Ibid 5 Law Commission, “Consumer sales contracts: transfer of ownership: A consultation paper”, Paper No. 246, para. 2.56, 27 July 2020, [online] (accessed 20 October 2020) 6 Ibid, para. 1.2 7 Commons Library Briefing, 30 October 2020

online. According to data from the Office of National Statistics (ONS), internet sales as a percentage of total retail sales increased from 2.7% in January 2007 to 19.9% in January 2020. 5.4 The COVID-19 emergency, which saw the forced closure of non-essential retail outlets, is likely to exacerbate these trends in the retail industry. The Centre for Retail Research forecasts that store closures will increase by 25% in 2020 over 2019 levels as a result of retailers entering insolvent administration. ONS data shows that, in May 2020 during the COVID-19 emergency, the share of online sales in total sales jumped to 32.8%.7 For the Law Commission, these trends underline the importance of having clear rules for the transfer of ownership of goods. On the one hand, the growth of online retail means that consumers are increasingly paying for goods in advance of delivery. These online sales often require full prepayment for goods and will usually involve unascertained goods8 coming from a retailer’s general stock. On the other hand, the increase in retailer insolvencies means that consumers are more likely to find themselves in a position where they have prepaid for goods that have not been delivered.9 On insolvency it will be up to the appointed insolvency practitioner to identify which goods are held and owned by the retailer. If ownership has transferred to a consumer then the insolvency practitioner will have to make the goods available to the consumer for collection. If ownership has not transferred, then the consumer will simply become an unsecured creditor and will be at risk of losing the money they have prepaid for the goods.

7 Ibid, para. 1.2 8 For a definition and description of unascertained goods, see Section 4 of this paper 9 Law Commission, “Consumer sales contracts: transfer of ownership: A consultation paper”, Paper No. 246, para. 5.5, 27 July 2020, [online] (accessed 20 October 2020) 8 Consumer sales contracts: rules on the transfer of ownership of goods

2. Current law: when is a consumer contract formed?

Box 1: Formation of consumer contract for sale of goods • The main feature of a sale of goods contract is the transfer of ownership in the goods in exchange for money. • The timing of when a contract is formed impacts directly on the transfer of ownership. This is because the law surrounding the sale of goods is, for the most part, predicated on a contract being in place between the buyer and seller. • Online retailers often use of “terms and conditions” to delay formation of the sale contract.

2.1 When is a sales contract formed? The formation of a sales contract, like any other contract, requires an agreement comprising an . Offer and acceptance is a question of the parties’ intentions, objectively ascertained. This is also true of goods purchased online. The display of goods online is an “”, when the consumer adds an item to their virtual basket and clicks the button to place their order, the consumer makes an offer to the retailer to buy the goods. The question, then, is when is the offer is accepted? This is dependent on the retailer’s terms and conditions. Without the retailer’s terms and conditions, the sales contract would form (at the latest) when the retailer takes payment from the consumer. In other words, if there are no terms and conditions to delay formation, the contract of sale would form on payment by the consumer. This would precede dispatch of the goods in all cases where the retailer takes payment from the consumer at an earlier point.10 The Law Commission summarises the legal position as follows: “The taking of payment by the retailer would amount to an acceptance by the retailer of the consumer’s offer to purchase the goods. […] we think that a similar analysis applies when goods are purchased online as when they are purchased in store. […] We think that if the retailer charges the consumer’s card, that would amount to an acceptance of the consumer’s offer [to buy the good]. We see no reason why the taking of payment would amount to an acceptance when goods are purchased in store, but not when goods are purchased online.”11

2.2 How do terms and conditions delay formation of a sale contract? Retailers, particularly online retailers, commonly seek to delay formation of a consumer contract until the goods are dispatched, or in some cases delivered, to the consumer. This practice may have significant implications for the transfer of ownership and potentially consumer rights more generally. In an online sales transaction, the retailer typically asks the consumer to agree to a set of terms and conditions before the consumer places their order. There are various possibilities, for example:

10 Law Commission, “Consumer sales contracts: transfer of ownership: A consultation paper”, Paper No. 246, para. 4.13, 27 July 2020, [online] (accessed 20 October 2020) 11 Ibid, para. 4.12 9 Commons Library Briefing, 30 October 2020

• the consumer might be asked to tick a box to indicate their agreement to the terms and conditions; • alternatively, a statement such as the following may appear next to the “place order” button: “By placing your order you agree to our terms and conditions of sale”; or • the words “terms and conditions” may be hyperlinked to a separate webpage containing the full text of the retailer’s terms and conditions. The full text of the terms and conditions will usually contain statements regarding the formation of the sales contract. These statements purport to prescribe the time at which the retailer will accept the consumer’s offer. Typically, the terms and conditions state that the consumer’s offer is not accepted by the retailer until the goods are dispatched. Assuming these terms and conditions delaying formation of the contract are legally effective, the sales contract will not form between the consumer and the retailer until dispatch of the goods, even if the consumer has paid for the goods. In circumstances where there is a long lead time between order and dispatch, the contract will form weeks after the consumer has paid for the goods. This is significant because during that time, the consumer will not have the benefit of certain consumer rights or protections which depend on there being a contract in place.

2.3 Why delay the formation of the contract? Once the sales contract forms, the trader is under an obligation to deliver the goods to the consumer. The clock is ticking because under section 28 of the CRA 2015 the trader is required to deliver the goods without “undue delay” and in any event not more than 30 days after the day the sales contract is entered into. As such, retailers often use terms and conditions to delay the formation of the sales contract and allow themselves more time. Another reason is to avoid any supply problems. For example, delaying the contract until dispatch means that the retailer is not under an obligation to deliver where the goods are not in stock.

2.4 Possible consumer detriment

Box 2: Timing of contract formation and its possible impact on consumer rights • Delaying the formation of the sale contract until the goods are “dispatched” to the consumer may affect the timing of the transfer of ownership of the goods. • It may also impact on other consumer rights that are dependent on the existence of a contract, such as the consumer’s right to delivery under the CRA 2015 and the right to seek a refund from their card issuer under section 75 of the Consumer Credit Act 1974 (CCA 1974).

The Law Commission is concerned that retailers use of terms and conditions to delay the formation of a sale of goods contract may cause detriment to consumers. It has identified two consumer rights that might be compromised by this practice, namely: • the consumer’s right to delivery of the goods under section 28 of the CRA 2015; and • the rights of a consumer under section 75 of the Consumer Credit Act 1974 (CCA 1974). In brief, section 28 of the CRA 2015 implies into a sales contract a term that the retailer will deliver the goods to the consumer without undue delay, or within 30 days of the 10 Consumer sales contracts: rules on the transfer of ownership of goods

contract being formed. This provision is of little value if the contract does not form until dispatch. The Law Commission points out that if the consumer pays for goods which are never delivered, the absence of the contract does not leave the consumer without a remedy. For online sales, the consumer can withdraw their offer to enter into the contract under regulation 32(1) of the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013, in which case the trader must reimburse all payments received from the consumer. In addition, the consumer may have a claim for restitution under the law of .12 The difficulty is that neither option would allow the consumer to recover consequential losses,13 whereas a contract claim may allow for this. Under section 75 of the CCA 1974, a consumer who has a “ or ” claim against a retailer can simultaneously make a like claim against their credit card issuer, provided they have paid between £100 and £30,000 on the credit card. In effect, the credit card issuer is jointly and severally liable for any breach of contract or misrepresentation by the retailer, but the consumer cannot recover their losses from both. Obviously, this right is particularly useful to the consumer if the retailer has gone into insolvency. The potential difficulty is that if retailers use terms and conditions to delay formation of a sales contract and goods are not delivered, it may be difficult for the consumer to prove breach of contract for a section 75 claim. However, the Law Commission is not aware of any credit card issuer refusing a section 75 claims on the basis that the contract of sale has not yet been entered into.14 Finally, the Law Commission thinks that terms and conditions delaying contract formation may be “unfair” contract terms or consumer notices under Part 2 of the CRA 2015. In a nutshell, a term is “unfair” if, contrary to good faith, it causes a significant imbalance in the parties’ rights and obligations to the detriment of the consumer. The Law Commission’s argument is as follows: 4.26 We think terms delaying formation might meet this [unfair] test. They potentially create an imbalance between retailer and consumer, as the consumer is obliged to pay money to the retailer without the retailer being under a contractual obligation to deliver the goods. This potentially causes detriment to the consumer insofar as the transfer of ownership rules do not apply and the consumer’s right to delivery under section 28 of the CRA 2015, and possibly their section 75 rights, are compromised. Further, as these terms do not appear to be brought specifically to consumers’ attention by retailers, we think that they potentially offend the principle of good faith, which requires disadvantageous terms to be given “appropriate prominence”.15

12 Unjust enrichment is part of the law of obligations, along with the law of contract, and trusts. It deals with a situation where one person is required to make restitution of a benefit acquired at the expense of another in circumstances which are unjust. 13 Consequential loss (also known as indirect loss) arises from a special circumstance of the case, not in the usual course of things. It is recoverable only if the paying party knew or should have known of that circumstance when it made the contract. In contrast, a direct loss is the natural result of the breach in the usual course of things. Most foreseeable kinds of loss are direct, including financial losses such as loss of profits and loss of business or goodwill. 14 Law Commission, “Consumer sales contracts: transfer of ownership: A consultation paper”, Paper No. 246, para. 4.21, 27 July 2020, [online] (accessed 20 October 2020) 15 Ibid, para 4.26 11 Commons Library Briefing, 30 October 2020

3. Current transfer of ownership rules

Many aspects of the contractual relationship between consumers and retailers for the sale of goods are now set out in the CRA 2015, but the transfer of ownership rules are not. Instead, the rules are contained in the SGA 1979. When referring to the transfer of ownership, the CRA 2015 simply refers back to the relevant provisions in the SGA 1979.16 Current rules on the transfer of ownership are substantially the same as those found in the original Sale of Goods Act 1893. The rules use the outdated terminology of “ passing” instead of the more usual term of “ownership transferring” from seller to buyer. Importantly, the complex rules distinguish between: • specific goods; • unascertained or future goods; and • goods forming part of a bulk. 3.1 Specific goods Specific goods are goods which are identified and agreed upon at the time the contract of sale is made. The transfer of ownership rules relating to specific goods are most likely to apply to consumers who have made purchases in-store rather than online. This is because the goods will be physically in store and the exact item being purchased will have been identified. For example, a consumer selects a red jumper in his size from shop rails and takes it to the till to pay for it. In contrast, a consumer who buys the same jumper online from the same retailer is not buying a specific good, this is because the retailer is free to provide the consumer with any jumper from its stock which matches the description and size the consumer has ordered. That said it is possible to purchase specific goods online, for example, where an item is a “one off” such as an antique. Section 17(1) of the SGA 1979 provides the general rule that where there is a contract for the sale of specific property, ownership is transferred to the buyer when the parties to the contract intend it to pass. To understand the intention of the parties it is necessary to consider the terms of the contract, the conduct of the parties and the circumstances of the case. The default position under section 18 is that ownership of specific goods transfers when the contract is made, provided that the goods are in a “deliverable state”. For the purposes of the Act, goods are in a deliverable state when they are in such a state that the buyer would under the contract be bound to take delivery of them.

16 The relevant sections of the Sale of Goods Act 1979 to which the CRA 2015 cross- refers are: section 16: goods must be ascertained; section 17: property passes when intended to pass; section 18: rules for ascertaining intention; section 19: reservation of right of disposal; section 20A: undivided shares in goods forming part of a bulk; and section 20B: deemed consent by co-owner to dealings in bulk goods 12 Consumer sales contracts: rules on the transfer of ownership of goods

The difficulty, as the Law Commission points out, is that little guidance is provided by the case law on when goods are in a “deliverable state”: “We [the Law Commission] think it is undesirable that the ownership of specific goods should be so unclear. While the courts might construe the law to benefit a consumer, in practice it is usually the insolvency practitioner who is interpreting the rules. As insolvency practitioners owe duties to all creditors they may be inclined to err on the side of caution and instruct shop or warehouse staff not to release such property to prepaying consumers.”17 On the retailer’s insolvency, the current rules force the insolvency practitioner to answer difficult questions of contractual construction. The Law Commission gives the example of a consumer who selects and pays for a diamond ring in a shop, but leaves the ring with the retailer to be inscribed, but the retailer goes insolvent before the inscription is completed, is the ring in a deliverable state? Is the consumer bound to take delivery only when the inscription is completed, or is the inscription the subject of a separate contract of sale? Since it is a matter of contractual construction, insolvency practitioners might give different answers to these questions, creating uncertainty for consumers about their ownership of specific goods in the event of insolvency.

3.2 Unascertained or future goods Unascertained goods are goods which are not identified and agreed upon when the contract is made. For example, if a consumer buys online and the retailer is free to select which item among his warehouse stock to send to the consumer to fulfil the contract, this is a contract for “unascertained goods”. Alternatively, the goods may not yet have been made (“future goods”). The general rule is that ownership of goods cannot be transferred to the buyer unless and until the goods have been “ascertained”; it is not possible for the parties to a contract to agree otherwise. Goods become ascertained once they have been identified to the contract in accordance with the agreement of the parties. Once ascertained, ownership of the goods will transfer at such time as the parties intend it to be transferred. To establish the intention of the parties it is necessary to consider the terms of the contract, the conduct of the parties and the circumstances of the case. Unless a different intention appears, Rule 5 of section 18 of the SGA 1979 will apply: “[that] in the absence of any contrary intention, property passes in a contract for the sale of unascertained or future goods when they are in a “deliverable state” and “unconditionally appropriated” to the contract.” Goods are in a “deliverable state” when they are in such a state that the buyer would under the contract be bound to take delivery of them. Although not defined in the Act, section 18 (Rule 5(2)) provides that

17 Law Commission, “Consumer sales contracts: transfer of ownership: A consultation paper”, Paper No. 246, para. 2.18, 27 July 2020, [online] (accessed 20 October 2020)

13 Commons Library Briefing, 30 October 2020

“unconditional appropriation” occurs when the seller delivers the goods18 to the buyer and does not “reserve the right of disposal”. In other words, the goods must be “unconditionally appropriated” to the contract and the appropriation must be irrevocable (i.e. the person making the appropriation intends it to be final). The appropriation must also be assented to by the other party. This assent can be express or implied and given either before or after the appropriation.19 According to the Law Commission, this requirement that unascertained goods must be “unconditionally appropriated” to the contract, creates uncertainty for consumers about whether they can claim goods in an insolvency situation.20 In considering what acts might amount to unconditional appropriation, the Law Commission said: The generally accepted position is that such setting aside, labelling, packing etc for the buyer by the seller is insufficient; and that the goods have not been irrevocably committed to the contract until the seller does the last act they must do before surrendering control over the goods. This last act might be, for example, handing them to a courier for delivery to the customer or sending an invoice detailing the specific goods to be supplied under the contract. 2.33 However, we noted that Professor Michael Bridge was of the view that sending an invoice specifying goods is not sufficient for an unconditional appropriation. Rather, he said, “in practical terms, it means delivery”. 2.34 Unless a different intention appears, Rule 5 of section 18 will apply. We said that the uncertainty surrounding the meaning of “unconditional appropriation” in this rule makes the law difficult for consumers to understand and for insolvency practitioners to apply. We think that “unconditional appropriation” should be replaced with a clearer test for determining when ownership transfers in a consumer context.21 The courts have also considered the meaning of “unconditional appropriation”, the context usually being whether certain acts by a seller have been enough to indicate unconditional appropriation with the assent of the buyer. However, the decisions reached by the court in these cases do not provide a simple definition of “unconditional appropriation” and, in practice, it can still be difficult to establish whether unconditional appropriation has occurred.22

18 Although the term “unconditionally appropriated” is generally thought to mean delivery, in some cases the courts have found that the mere setting aside of goods has been sufficient 19 For example, it could be, that by purchasing goods by description, the buyer has impliedly authorised the seller to select goods matching that description from their general stock and appropriate them to the contract. Alternatively, where goods are sold by sample, the seller may not be taken to have authority to pass the property by appropriation, for the parties may have intended that the buyer should have the right to compare the goods with the sample. 20 Law Commission, “Consumer sales contracts: transfer of ownership: A consultation paper”, Paper No. 246, para. 2.32, 27 July 2020, [online] (accessed 20 October 2020) 21 Ibid, para. 2.32 to 2.34 22 See Carlos Federspiel & Co v Charles Twigg & Co. Ltd [1957] 1 Lloyd’s Rep 240 14 Consumer sales contracts: rules on the transfer of ownership of goods

3.3 Goods forming part of a bulk The transfer of ownership rules in the SGA 1979 also deals with goods forming part of a bulk. In practice, it is relatively rare for consumers to purchase goods which form part of a bulk. An example might be a contract to purchase a length of carpet forming part of a roll identified in the contract or by the parties in a physical shop. In brief, where there is a contract for the sale of a share (a fraction or a percentage) of an identified bulk, this is treated as a contract for the sale of specific goods. Ownership in the undivided share passes, under section 17 of the SGA 1979, “when the parties intend it to pass” and the buyer becomes an “owner in common” with the other owner or owners. In contrast, where there is a contract for the sale of a quantity of goods from an identified bulk, these goods are not specific goods and are therefore unascertained goods under the SGA 1979. Under the current rules in the SGA 1979, there is a two-stage transfer of ownership process for unascertained goods which form part of a bulk (see Box 3 below).

Box 3: Two-stage transfer of ownership process for unascertained goods which form part of a bulk • First stage: A buyer can become an “owner in common” of a bulk before the goods have been separated.23 This transfer happens as a result of the operation of section 20A of the SGA 1979, which provides a mechanism whereby ownership in an undivided share (described as a specific quantity) of the bulk passes to the buyer before ascertainment of the actual goods covered by the contract. The “undivided share”24 is transferred to the buyer and the buyer becomes an owner in common of the bulk.25 Section 20B of the SGA 1979 provides that all co-owners are deemed to have consented to dealings in the bulk, including delivery to any other owner in common. It should be noted that this first stage of ownership is merely an interim stage of ownership “in common” with any other owners of the bulk.

The rules in sections 20A and 20B only apply if the contract of sale is for a specific quantity of goods in a bulk, the bulk is identified in the contract or subsequently, and the buyer has pre-paid for some or all of the goods sales out of a bulk. If these conditions are not met, the normal rules in sections 16, 17 and 18 of the SGA 1979 will apply and buyers will not have the benefit of co- ownership of a bulk under section 20A.

23 If the contract of sale is for a specific quantity of goods in the bulk, the bulk is identified in the contract and the buyer has prepaid for some of the goods 24 An “undivided share” is the proportion of goods in the bulk for which the buyer has paid. So, if the buyer pays for one tonne of gravel (to improve his drive) out of an identified bulk containing 10 tonnes, the buyer becomes the owner of an undivided share of one tenth. In other words, the buyer does not own any particular gravel, but instead owns a proportion of the total gravel stored on a truck. If the seller becomes insolvent while the gravel is still on the truck, the buyer can claim one tenth of the stone. 25 Sub-sections 20A(3) to (6) of the Sale of Goods Act 1979 provide a mechanism for calculating the quantity of goods due to each buyer who is a co-owner of a bulk. This mechanism is necessary because a bulk could be co-owned by multiple buyers and the particular quantities purchased by individual buyers could exceed the bulk if it fluctuates in size. In contrast, where a buyer has contracted to buy a fraction or percentage of a bulk (as opposed to a specific quantity out of a bulk), such complicated mechanisms are not required. This is because the share due to the buyer will always be that fraction or percentage of whatever the bulk is at that time. 15 Commons Library Briefing, 30 October 2020

• Second stage: The second stage is where the buyer becomes the owner of the specific quantity of goods which it has contracted to buy. Transfer of ownership of the specific quantity of goods occurs in accordance with the rules in section 16 of the SGA 1979 (goods must be ascertained), section 17 (property passes when intended to pass), and section 18 (rules for ascertaining intention). In other words, the goods must be ascertained and ownership transfers when the parties intend it to transfer. Unless a different intention appears, the presumptions in section 18 will apply and ownership will transfer when the goods are in a “deliverable state” and “unconditionally appropriated” to the contract of sale.

In the context of bulk goods, goods are ascertained for the purposes of a contract of sale when:

“[…] they are separated from the bulk or through exhaustion (when the bulk is reduced to the amount of goods subject to the contract). They are then only unconditionally appropriated to the contract of sale when some further step or act occurs which means that the contract is irrevocably attached to those goods so that those goods and no others are the subject of the sale. They are in a deliverable state when they are in such a state that the buyer would under the contract be bound to take delivery of them.”26

26 Law Commission, “Consumer sales contracts: transfer of ownership: A consultation paper”, Paper No. 246, para. 2.37, 27 July 2020, [online] (accessed 20 October 2020)

16 Consumer sales contracts: rules on the transfer of ownership of goods

4. Consultations on reform of transfer of ownership rules

The following provides some background to the Law Commission’s work to reform the current transfer of ownership rules.

4.1 Law Commission consultation - June 2015 The collapse of the Farepak Christmas savings club in 2006, resulting in a high number of vulnerable consumers losing their money, and the insolvencies of several high-profile retailers, brought into sharp focus the level of protection available to consumers making prepayments for goods. The then Department for Business, Innovation and Skills (now BEIS27) commissioned the Law Commission to review whether there is a need for greater protection. Having gathered about the scale of the problem, the Law Commission published on 18 June 2015 a consultation paper, “Consumer Prepayments on Retailer Insolvency”, on possible solutions.28 The consultation closed on 17 September 2015. Following analysis of the 41 responses received, the Law Commission developed final recommendations which it set out in its 2016 report.

4.2 Law Commission’s Final Report - July 2016 The Law Commission’s Final Report, “Consumer Prepayments on Retailer Insolvency”,29 was published on 13 July 2016. The report sets out five recommendations designed to improve the position of a consumer (who has paid in advance for goods) on insolvency of the retailer, namely: • Regulating Christmas and similar savings schemes, which pose a particular risk to vulnerable consumers. • Introducing a general power for Government to require prepayment protection in sectors which pose a particular risk to consumers. • Giving consumers more information about obtaining a refund through their debit or credit card issuer. • Making a limited change to the insolvency hierarchy, to give a preference to the most vulnerable category of prepaying consumers. • Making changes to the rules on when consumers acquire ownership of goods.

27 Department for Business, Energy and Industrial Strategy 28 Law Commission, “Consumer Prepayments on Retailer Insolvency: A Consultation Paper”, 18 June 2015, CP221, [online] (accessed 20 October 2020) 29 Law Commission, “Consumer Prepayments on Retailer Insolvency”, Law Com No 368, July 2016, [online] (accessed 20 October 2020) 17 Commons Library Briefing, 30 October 2020

Arguing that consumers need a clear, modern statement about when they will acquire ownership of goods, the Law Commission said that transfer of ownership rules should be updated and moved into the CRA 2015. It said: […] the Law Commission has long argued that the law on consumer sales should be rewritten in plain language and brought together in one place, so that it is easily accessible to consumers and retailers. The Consumer Rights Act 2015 has gone a long way to achieve this objective, but it does not include updated rules on when ownership is transferred. Instead, section 4 of the [Consumer Rights Act 2015] imports the rules from the [Sale of Goods Act 1979], which were written in nineteenth century language for commercial contracts.30 The Government published its response on 28 December 2018.31 In brief, the Government said it would consult on new protections for consumers using Christmas savings schemes and, in due course, consider updating the current rules of transfer of ownership of goods. In the meantime, the Insolvency Service would take forward the Law Commission’s recommendation that consumers receive better information in the event of insolvency. 4.3 Current Law Commission consultation & draft Bill – July 2020 In September 2019, the Department for Business, Energy & Industrial Strategy (BEIS) asked the Law Commission to prepare draft legislation to implement its recommendation to modernise and simplify the transfer of ownership rules. This led to the publication on 27 July 2020 of the consultation paper, “Consumer sales contracts: transfer of ownership”, containing draft legislation. The consultation closes on 31 October 2020. If enacted, the draft Bill would update and move the transfer of ownership rules into the CRA 2015. Ownership of specific goods would transfer at the time the contract is made; and ownership of unascertained goods would transfer when goods are identified for fulfilment of the contract. Inserted into the Act would be a non- exhaustive list of events that would be sufficient to identify goods as being linked to a contract and result in a transfer of ownership from the retailer to the consumer (see Section 5 of this paper). The Law Commission can make recommendations only for and , but the CRA 2015, which the draft Bill seeks to amend, applies to the whole of the UK. Consumer law is also a reserved rather than a devolved matter. The Law Commission’s hopes that the Government will consider implementing its draft legislation throughout the UK, after appropriate engagement with the devolved administrations:

30 Law Commission, “Consumer Prepayments on Retailer Insolvency”, Law Com No 367, para. 9.52, 13 July 2016, [online] (accessed 20 October 2020) 31 Department for Business, Energy & Industrial Strategy, “Law Commission Report on Consumer Prepayments on Retailer Insolvency: Government Response”, 28 December 2018, [online] (accessed 20 October 2020) 18 Consumer sales contracts: rules on the transfer of ownership of goods

Large retailers operating in England and Wales tend to have stores in Scotland and , and we think that consumers would expect their rights to be consistent across the . It would therefore be difficult to have differing levels of protection in each jurisdiction.32

32 Law Commission, “Consumer sales contracts: transfer of ownership: A consultation paper”, Paper No. 246, para. 1.16, 27 July 2020, [online] (accessed 20 October 2020)

19 Commons Library Briefing, 30 October 2020

5. Law Commission’s draft Bill

The Law Commission’s draft Bill, the Consumer Rights (Transfer of Ownership under Sales Contracts) Bill, can be found at Appendix 2 of its 2020 consultation paper. It sets out in simple terms when ownership of goods will transfer to the consumer.33 According to the Law Commission, the aim is to make some relatively limited changes to the current rules on transfer of ownership to improve certainty for consumers, retailers and insolvency practitioners.34 The proposed rules would apply in all circumstances and not just on insolvency, but it is on insolvency where consumers are most vulnerable and where the timing of transfer of ownership may be of most importance. This is because, in most other situations, the important issue is whether the goods are at the seller’s or buyer’s risk (in the case of loss or damage), rather than where ownership lies (see section 5.6 below).35 Details of the changes are considered below.

5.1 Scope of the proposed new rules As outlined in the previous section, the CRA 2015 does not contain rules on transfer of ownership. Instead, section 4(2) of the Act cross- refers to the transfer of ownership provisions in Part III of the SGA 1979. If enacted, the draft Bill would insert transfer of ownership rules into the CRA 2015 (thereby disapplying the current provisions in the SGA 1979). Specifically, it would replace section 4(2) and inserts transfer of ownership rules into new sections 18A and 18B of the CRA 2015. The timing of the transfer of ownership under a consumer contract would be determined by those sections. The CRA 2015 already provides that sales contracts can be entered into between one part-owner and another and for the transfer of an undivided share in goods. However, for the avoidance of doubt paragraphs 18A(1)(b) and 18B(1)(b) of the draft Bill provide that the new transfer of ownership rules would apply when the sales contract is for an undivided share of goods. The proposed transfer of ownership rules would apply to “sales contracts”, defined in the CRA 2015 as a contract under which the trader agrees to transfer ownership of goods to the consumer in exchange for the price. It is important to note that sales contracts can be absolute or conditional. The proposed rules would apply to sales contracts which are conditional but not to “conditional sales contracts”. This is a crucial distinction. Conditional sales contracts, as defined in the CRA 2015, are contracts under which the price for the goods, or part of it, is payable by instalments and the trader retains

33 See Law Commission, “Consumer sales contracts: transfer of ownership: A consultation paper”, Paper No. 246, Appendix 2 Draft Bill, 27 July 2020, [online] (accessed 20 October 2020) 34 Law Commission, “Consumer sales contracts: transfer of ownership: A consultation paper”, Paper No. 246, para. 5.1, 27 July 2020, [online] (accessed 20 October 2020) 35 In consumer cases, risk does not pass to the consumer until delivery, regardless of when ownership transfers 20 Consumer sales contracts: rules on the transfer of ownership of goods

ownership of the goods until the conditions specified in the contract (for the payment of instalments or otherwise) are met. If enacted, the proposed rules would apply only to contracts governed by the law in England and Wales. This means that where UK consumers agree to buy goods online from retailers based outside the jurisdiction, say from America, then in all probability the sales contract would be governed by US law and the proposed transfer of ownership rules would not apply. This is an obvious weakness, given the rules are aimed at protecting consumers online.

5.2 New modern terminology The transfer of ownership rules in the draft Bill use the more modern language of the CRA 2015. For example, they refer to “trader” and “consumer” (rather than “buyer” and seller”) and “transfer of ownership” (rather than “passing of property”). The draft Bill distinguishes between two types of goods: • “goods which are identified and agreed on when the contract is made” (e.g. items selected in a physical shop or where there is only one item, such as an antique bought online); and • “goods which are not identified and agreed on when the contract is made” (e.g. items ordered online out of a retailer’s general stock). With its focus on the “identification” of goods, this new terminology would replace the outdated terminology currently used in the SGA 1979 of “specific goods” and “unascertained goods”. The terms “deliverable state”, “ascertainment” and “unconditional appropriation”, which are open to interpretation under the current law, do not feature in the draft Bill.

5.3 “Goods identified and agreed” (currently referred to as specific goods)

Box 4: Goods which are identified and agreed on when a sales contract is made • The draft Bill provides for new rules on transfer of ownership to be inserted into section 18A of the CRA 2015, which set out when ownership transfers in goods which are identified and agreed on when a sales contract is made. • The proposed rules would replace the existing rules on transfer of ownership of specific goods in sections 17 and 18 (Rules 1 to 4) of the SGA 1979. • Items which a consumer has personally selected in a physical shop would be an obvious example of goods which are identified and agreed on when a sales contract is made. However, they could also be goods which are purchased online if they are sufficiently well identified when the contract is made (e.g. a “one-off” such as an antique).36

Contracts for the sale of goods that are identified and agreed at the time the contract is made would, under the draft Bill, include a term

36 The proposed rules would apply where a sales contract is for such goods or an undivided share of such goods, specified as a fraction or percentage 21 Commons Library Briefing, 30 October 2020

that “ownership of the goods transfer to the consumer when the contract is made”. This would be the case even if the goods were left with the retailer for alteration. There is no requirement that the goods must be in a “deliverable state.” For example, under the draft Bill, the consumer who chooses a diamond ring in a shop would obtain ownership of the ring at the time the contract is made, even if the ring is left with the shop to be altered or inscribed. If the retailer becomes insolvent between the contract forming and the alterations being completed, the diamond ring will be owned by the consumer. The insolvency practitioner must make the ring available to the consumer.37 The Law Commission believes that removing the requirement that goods be in a “deliverable state” would provide clarity for consumers, make it easier for insolvency practitioners to release stock to prepaying consumers where appropriate. It would also address the perception of the law as unjust, “It would be fairer to consumers and more aligned to common expectations.”38 However, the Law commission acknowledged that “if an additional step is required before the goods can be removed from a shop or showroom (as in the example of a display kitchen), the burden of taking this step is likely to fall on the consumer in an insolvency situation so that that they can take possession of the goods”.39

5.4 “Goods not identified and agreed upon” (currently referred to as unascertained goods)

Box 5: Goods not identified and agreed upon • The draft Bill provides for new rules on transfer of ownership of goods which are not identified and agreed on when the contract is made. The proposed rules would be inserted into section 18B of the CRA 2015. • The proposed rules would replace the existing rules on transfer of ownership of unascertained goods in sections 16,17 and 18 (Rules 1 to 4) of the SGA 1979.

• Items which a consumer has purchased online out of a retailer’s general stock would be an obvious example of goods which are not identified and agreed upon when a sales contract is made. Another example would be where the consumer has made a purchase of furniture in a physical store, having seen a display item, but has not seen the actual item they are buying. This will be dispatched from the retailer’s warehouse.

Contracts for the sale of goods that are not identified and agreed upon at the time the contract is made would, under the draft Bill, be treated as including a term that ownership transfers when the “goods that are

37 The retailer is contractually bound to complete the alterations, but since the retailer is insolvent this is unlikely to happen. If the consumer paid for the suit using a credit card, they may be able to recover some money from the card provider under section 75 of the Consumer Credit Act 1974 or, if a debit card, the card issuer’s chargeback rules. 38 Law Commission, “Consumer Prepayments on Retailer Insolvency”, Law Com No 368, para. 9.58, 13 July 2016, [online] (accessed 20 October 2020) 39 Ibid 22 Consumer sales contracts: rules on the transfer of ownership of goods

to be used to fulfil the contract are identified by the trader”. There is to be no requirement that the goods must be “unconditionally appropriated” to the contract. The draft Bill sets out a non-exhaustive list of events and circumstances which would be sufficient to identify goods to the contract.40 Specifically, ownership of goods transfers to the consumer when the first of the following occurs— • The goods are labelled with the consumer’s name in a way that is intended by the trader to be permanent. The Law Commission recognises that in an insolvency situation, the retailer’s practices in relation to labelling will be relevant when considering whether goods have been labelled in a way that is intended to be permanent. • The goods are set aside for the consumer in a way that is intended by the trader to be permanent. This does not necessarily mean that the goods which are to be used to fulfil the contact are physically set aside in a warehouse and left untouched until delivery to the consumer. According to the Law Commission, it could include situations where it is clear that an item is intended for a specific consumer, for example because the retailer has ordered it from a supplier specifically to satisfy that consumer’s order. • The alteration of the goods to a specification agreed between the trader and the consumer is completed. Where a consumer has contracted to buy an item from the retailer’s general stock which is to be altered to a specification agreed between the consumer and the trader, ownership will not transfer under this rule until that alteration is complete. • The consumer is told by the trader that goods bearing a unique identifier will be used to fulfil the contract. Although the Law Commission does not think that this situation will arise regularly in a consumer context, it includes it because where it does arise it might relate to high-value goods where the consumer will have a particular interest in obtaining ownership. (For example, a consumer purchases a smartphone from the retailer’s general stock and the retailer emails the consumer with the International Mobile Equipment Identity (IMEI) number before the smartphone is dispatched). • On examining the goods, the consumer agrees that they are to be used to fulfil the contract. This provision is not intended to impact upon the requirement that goods be of satisfactory quality under section 9 of the CRA 2015, and a consumer’s right to reject goods under sections 20 to 24 – those provisions will still apply.41

40 Section 18(b)(4) of the draft Bill 41 If, having taken delivery of the goods, it is apparent the goods are faulty, the consumer has 30 days to return them. However, under section 9 of the Consumer Rights Act 2015, if the consumer has examined the goods before contract, then a defect which should have been revealed by the examination will not be grounds for finding the goods to be unsatisfactory. 23 Commons Library Briefing, 30 October 2020

• The goods are handed to a carrier for delivery to the consumer. The Law Commission said it had in mind a situation where goods may be released by a retailer to a carrier in anticipation of delivery to the consumer but on the instruction that they should not be delivered until further notice. This could occur where a consumer has paid a deposit on goods and the retailer does not intend to deliver the goods until full payment has been received. The Law Commission thinks that in this situation, ownership of the goods should transfer on delivery to the carrier, albeit that the exact timing of the delivery has not yet been confirmed. • The goods are delivered to the consumer. The Law Commission considers that ownership should transfer even if the consumer has not paid any (or all) of the purchase price. The retailer (or the insolvency practitioner) would then have a debt claim against the consumer for payment. • The goods that are to be used to fulfil the contract are identified by the trader in some way, and the trader intends the dentification to be permanent. The aim is to provide clarity for consumers as to when they will acquire ownership of goods they have contracted to buy. The Law Commission believes the list is easier to understand than the existing rules in the SGA1979 which require goods to be “ascertained”, “unconditionally appropriated” and in a “deliverable state” before ownership can transfer. The list should also enable insolvency practitioners more easily to determine whether a transfer of ownership has occurred between the entry into the contract and the retailer’s insolvency. As already mentioned, a contract for “future goods” is a sales contract for goods which are to be manufactured to a consumer’s own specification. Under the draft Bill, ownership would only transfer to the consumer when the manufacture is complete.42 For example, where a consumer selects the style and fabric of a sofa which is then made to order, ownership of the sofa will transfer when the manufacture is completed. This means that if the retailer enters insolvency before completion, the consumer will not obtain ownership of the component parts of their sofa.

5.5 Rules to be mandatory If the draft Bill were enacted, the new transfer of ownership rules would be mandatory (unlike those currently in the SGA 1979 which can be displaced by a contrary intention of the parties). Specifically, sections 18A(4) and 18(b)(5) state that any contract term purporting to provide for ownership of goods to transfer to the consumer at a later time than under the rules would have no effect. This reflects the recommendation the Law Commission made in its 2016 Final Report

42 If enacted, the draft Bill would insert new section 18B(3) into the Consumer Rights Act 2015. This section only applies where goods are to be manufactured according to a specification agreed between the consumer and the trader. In any other case, including where a consumer enters into a sales contract for generic goods which are yet to be manufactured, ownership transfers under proposed new section 18B(4) of the draft Bill. 24 Consumer sales contracts: rules on the transfer of ownership of goods

that any term in the contract which would put the consumer in a worse position should be of no effect. In addition, the draft Bill would prevent a sales contract imposing conditions upon the transfer of ownership.43 Currently, a trader can use section 19 of the SGA 1979 to delay transfer of ownership of goods to a buyer until certain conditions are fulfilled (for example, until full payment is received by the seller). Under the draft Bill it would not be possible, and ownership would transfer in accordance with proposed new sections 18A and 18B of the CRA 2015. The Law Commission’s aim is to help consumers who have paid substantial deposits prior to a retailer’s insolvency.44

5.6 Goods forming part of a bulk As already mentioned, consumers do sometimes enter into contracts for goods forming part of a bulk. For example, a consumer may agree to purchase 6 metres of carpet from a 40-metre roll. As outlined in section 3.3 of this paper, existing section 20A of the SGA 1979 sets out rules on transfer of ownership of goods forming part of a bulk. It provides for a buyer to become a co-owner of a bulk when certain conditions are met. The normal rules for transfer of ownership in sections 16, 17 and 18 of the SGA 1979 then apply to transfer ownership of the specific quantity of goods which the buyer has contracted to buy.45 The draft Bill does not seek to change how section 20A and section 20B of the SGA 1979 apply to consumer sales contracts – both sections would continue to apply. However, new rules would amend the conditions in subsection 20A(1) of the SGA 1979 which must be met for Changes to the rules on co- co-ownership to arise. Specifically, the new rules would provide that a ownership of bulk consumer becomes an owner in common of a bulk when: goods. (1) the consumer has paid the price for some or all of the goods which form part of the bulk; and (2) the bulk is identified for the purposes of the contract in one of the following ways: (a) the bulk is identified in the contract; (b) the bulk is identified by subsequent agreement between the trader and the consumer; (c) the trader provides the consumer with information after the contract is entered into which identifies the defined space or area containing the goods forming the bulk;

43 In the event of non-payment by the consumer, section 39 of the Sale of Goods Act 1979 would still apply, meaning that the trader would be able to exercise a lien over the goods 44 The draft legislation would not apply to conditional sale agreements (where the consumer pays for the goods in instalments and the trader retains ownership until all the conditions are met 45 The current rules in section 20A and section 20B of the Sale of Goods Act 1979 were introduced as a result of recommendations by the Law Commission and the Scottish Law Commission. They sought to address a perceived unfairness in the operation of the Sale of Goods Act 1979 which arose in relation to commodity trading where it is commonplace for sale of goods contracts to relate to quantities out of a bulk. 25 Commons Library Briefing, 30 October 2020

(d) the bulk is labelled with the consumer’s name or otherwise allocated to the consumer by the trader in a way that is intended by the trader to be permanent (whether or not it is also labelled with the names of others or otherwise assigned to others by the trader); (e) the consumer has examined the bulk and agreed that the goods that are the subject of the contract form part of it; (f) the bulk is delivered to a carrier for delivery to the consumer (whether or not the carrier is also to deliver some of the goods forming part of the bulk to others); or (g) the bulk is identified for the purposes of the contract in some other way. It is important to note that if such a change were to be implemented, it would only amend section 20A(1) of the SGA 1979. The remainder of sections 20A and 20B would continue to apply to consumer contracts unchanged. Importantly, if enacted, the consumer’s co-ownership of the bulk would be an interim stage. Ownership of the specific quantity of goods being purchased would only transfer to the consumer when the goods are identified for fulfilment of the contract under the rules in proposed section 18B of the CRA 2015 which apply to goods not identified and agreed on at the time the contract is made. In outline, the proposed procedure would be as follows: • If the relevant conditions in subsection 20A(1) are met, the consumer would become a co-owner of the bulk of goods. • All co-owners of the bulk (be they consumer or non-consumer The proposed owners) would be deemed to have consented to any dealings in procedure in the bulk goods, allowing for delivery of the specific quantity of outline. goods which the consumer has contracted to buy. • The proposed rules inserted into proposed section 18B of the CRA 2015 by the draft Bill would then apply to transfer ownership of the specific quantity of goods which the consumer has contracted to buy. • Proposed subsections 18B(3) and (4) provide a list of events and circumstances upon which ownership of goods would transfer. These events and circumstances relate to the “goods” which are the subject of the sales contract, not the bulk of which those goods may form a part. For example, in relation to labelling of goods under paragraph 18B(4)(a), ownership will transfer only when the specific quantity of goods which are the subject of the contract are labelled, not when the bulk is labelled. In other words, the goods must be separated from the bulk before ownership can transfer. Changes to the rules around co-ownership of bulk goods was not a recommendation in its 2016 Final Report, however, the Law Commission subsequently changed its position. It explained its reasoning as follows: 2.59 The law could provide more comprehensive protection to consumers so that they are not disadvantaged on an insolvency compared to other prepaying consumers, just because a retailer 26 Consumer sales contracts: rules on the transfer of ownership of goods

has held their goods as part of a bulk until delivery or very shortly before delivery. For example, where a consumer orders a specific amount of gravel which is held in a bulk in a truck until delivery to the consumer. […] 3.48 While the current rules in sections 20A and 20B of the SGA 1979 do apply to sales contracts between consumers and retailers, they will rarely assist a consumer as the conditions in section 20A are unlikely to be met. In particular, even where a consumer knows that they are making a purchase out of bulk, it is not common for the bulk to be identified in the consumer contract or by subsequent agreement between the trader and the consumer. 3.49 We think that there is an argument that the consumer should get ownership in common of a bulk as long as the retailer has identified that bulk as containing the goods which will be used to fulfil the contract. This approach would better reflect the consumer/retailer relationship than the existing rules in the SGA 1979 and would protect consumers who knowingly enter a contract for the sale of goods out of a bulk and also those consumers who are unaware that the goods they are purchasing will be held in bulk until delivery or very shortly before delivery.46

5.7 Transfer of risk Currently, under section 29 of the CRA 2015, goods remain at the trader’s risk until they come into the physical possession of the consumer (or a carrier commissioned by the consumer to deliver the goods). The draft Bill would not alter this position – section 29 would simply continue to apply.

5.8 Insolvency and the operation of the proposed transfer of ownership rules For the Law Commission, the operation of the proposed rules outlined in the draft Bill strikes a balance between prepaying consumers and other creditors. It explained the policy rationale as follows: 3.36 […] Under the existing law, ownership is unlikely to transfer until the goods have been dispatched, regardless of the fact that the retailer will have earmarked those goods for a consumer before that point. The proposed rules formalise this “earmarking” process so that transfer of ownership is linked to the identification of goods to the contract (notwithstanding any purported attempt by traders to delay such a transfer). This is less obviously unfair to consumers on an insolvency than the position under existing law. Ownership of goods may also transfer earlier in some situations than under existing law, so more consumers will have the protection of ownership rights if a retailer becomes insolvent before they receive their goods. 3.37 However, the impact of the proposed rules should not be overstated and it should be noted that they will not apply where a

46 Law Commission, “Consumer sales contracts: transfer of ownership: A consultation paper”, Paper No. 246, para. 2.59 and para. 3.48-3.49, 27 July 2020, [online] (accessed 20 October 2020)

27 Commons Library Briefing, 30 October 2020

consumer has made payment (in full or in part) but the goods to fulfil the order have not yet been identified. […] whether a retailer will be holding substantial numbers of goods which have been identified for fulfilment of particular contracts but which have not yet been dispatched will depend on the retailer’s operational model and the type of goods that they sell. 3.38 In the 2016 Report we considered and rejected a more radical proposal which would give consumers an ownership right in unascertained goods (goods not identified and agreed on at the time the contract is made) as soon as the contract was made. We thought that a wider rule may be difficult to apply in practice. Furthermore, it could result in a large proportion of the retailer’s stock belonging to consumers, significantly diminishing the assets available to other creditors.47

47 Law Commission, “Consumer sales contracts: transfer of ownership: A consultation paper”, Paper No. 246, para. 3.36 to 3.3.8, 27 July 2020, [online] (accessed 20 October 2020)

28 Consumer sales contracts: rules on the transfer of ownership of goods

6. Next steps

In its 2020 consultation paper, the Law Commission’s questions on the draft Bill conveniently fall into three sets: • First, whether the rules as drafted are sufficiently clear and comprehensive. The Law Commission asks if the proposed rules should apply beyond sales contracts, for example, to conditional sales contracts48 and contracts for the transfer of goods.49 • Second, the Law Commission asks about how the proposed transfer of ownership rules would interact with the propriety claims of other creditors in the event of the trader’s insolvency. The examples given by the Commission include suppliers who have a retention of title50 claim to the goods, or where a third- party warehouse asserts a lien over the goods as security for their unpaid fees. • A third set of questions asks stakeholders for more information about why retailers use terms and conditions to delay the formation of sale of goods contracts. The consultation closes on 31 October 2020. After reviewing responses to the consultation, the Law Commission has said it will finalise the text of the draft Bill. It will then be for the Government to decide whether to implement the Bill.

48 A conditional sales contract involves the sale of goods, the trader allows the buyer to take delivery of the goods outlined in the contract and pay for them later (usually by way of instalments) 49 Examples of “contracts for the transfer of goods “include conditional sale contracts, hire-purchase contracts, and any other contracts which involve the transfer of ownership of goods 50 A “retention of title” clause is a clause that allows the supplier to retain ownership over the goods supplied until such time as certain conditions are met, thus providing the supplier with a form of security against the buyer’s default of payment or insolvency.

About the Library The House of Commons Library research service provides MPs and their staff with the impartial briefing and evidence base they need to do their work in scrutinising Government, proposing legislation, and supporting constituents. As well as providing MPs with a confidential service we publish open briefing papers, which are available on the Parliament website. Every effort is made to ensure that the information contained in these publicly available research briefings is correct at the time of publication. Readers should be aware however that briefings are not necessarily updated or otherwise amended to reflect subsequent changes. If you have any comments on our briefings please email [email protected]. Authors are available to discuss the content of this briefing only with Members and their staff. If you have any general questions about the work of the House of Commons you can email [email protected]. Disclaimer This information is provided to Members of Parliament in support of their parliamentary duties. It is a general briefing only and should not be relied on as a substitute for specific advice. The House of Commons or the author(s) shall not be liable for any errors or omissions, or for any loss or damage of any kind arising from its use, and may remove, vary or amend any information at any time without prior notice. The House of Commons accepts no responsibility for any references or links to, BRIEFING PAPER or the content of, information maintained by third parties. This information is Number provided subject to the conditions of the Open Parliament Licence. 30 October 2020