Consumer Sales Contracts: Rules on the Transfer of Ownership of Goods

BRIEFING PAPER Number 9036, 30 October 2020 Consumer sales contracts: By Lorraine Conway rules on the transfer of ownership of goods Contents: 1. Introduction 2. Current law: when is a consumer contract formed? 3. Current transfer of ownership rules 4. Consultations on reform of transfer of ownership rules 5. Law Commission’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 Cover page image copyright: Online payment by Rupixen / image cropped. Licensed by Pixabay License – no copyright required. 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 Sale of Goods Act 1893. The rules are complex, technical and rely on outdated language. Unsurprisingly, consumers find the rules difficult to understand. When a contract of sale 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 Sale of Goods Act 1979 (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 Sale of Goods Act 1893 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 Consumer Rights Act 2015 (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.

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