Chris Bowser wins Mason Hayes essay prize 2024
Q4: Does the operation of the nemo dat rule in transactions involving the sale of goods require reform? Discuss critically.
Introduction
The nemo dat quod non habet maxim (shortened to the ‘nemo dat’ rule) can be directly translated as “no one gives what they do not have”, legally meaning a person cannot transfer a better title to goods than he himself possesses 1. The rule is now embodied in the Sale of Goods Act (SGA) 1979, underpinning the foundations of title transfers between goods in the U.K. today. However, despite its long-standing legal history, the rule continues to receive scrutiny from critics as providing too much protection to ‘true’ owners in a sale of goods transaction 2. The emergent debate subsequently contends between the ease of title transfers versus the security of ownership 3. This essay will critically analyse the question statement, but will lean more towards the criticism contending that the incumbent nemo dat rule might benefit from some level of reform, mainly out of a necessity to better facilitate the flow of modern-day commercial transactions.
The context for nemo dat
The often contestable circumstance that emerges whereby the nemo dat rule may be applied occurs when a non-owner seller acquires possession of a good from a true title owner, and then sells this good to an unsuspecting bona fide (‘good faith’) third party purchaser 4. Commonly, however, the seller turns out to be a fraudulent ‘rogue’, and before either the true owner or third party realises, the rogue disappears with the third party’s money, thus inhibiting the third party from suing the rogue for their missing funds (or, if the rogue is found, they are often illiquid and cannot repay the money owed). It is at this point where a title conflict transpires between the true owner’s claim for their good versus the innocent third party’s ‘good faith’ purchase from the rogue seller 5. In this situation, section 21(1) of the SGA stipulates that the law will start by prioritising a true owner’s rights under the nemo dat maxim 6, unless a bona fide third party can meet the criteria required for an exception, which may include estoppel, sale under a voidable title, seller or buyer in possession after sale, amongst others 7. The maxim and its exceptions have become increasingly more relevant in modern-day transactions, particularly in the case of personal property transfers, as there tends to be an informal nature of inquiry into a seller’s right to sell a good 8. As a result, non-title sellers are more common, allowing them to deceitfully acquire possession without a good’s title from a true owner, before subsequently transferring this fictitious title to an unsuspecting third party 9. It therefore begs the question- who should be afforded the right to sue and receive compensation for the good? The true owner or the bona fide third-party purchaser?
In defence of nemo dat
Although one could argue that most academic commentary regards the current English position on title transfers as somewhat arbitrary and inadequate, there is still a convincing case to be made in defence of the nemo dat’s merits in its present operation 10. As stated by L.J. Denning in Bishopsgate Motor Finance Corp v Transport Brakes, the law has striven for “mastery” in the “protection of property” under the nemo dat maxim 11. One can attest that a human’s need for protection over their personal property is a fundamental and, perhaps, inherent right as established by the law. After all, how can a society sustainably function without clear boundaries indicating one person’s (or business’s) personal property from another? One might contend that it is simply not possible, and as such, the nemo dat rule is more than justified in its current form. To add to this, one may state that the current nemo dat maxim, in conjunction with its exceptions, already provides an adequately predictable and stable framework that is required for modern-day commercial transactions. In the same aforementioned case, L.J. Denning highlights that despite “the first principle [nemo dat]… having held sway for a long time”, the evolving legislation with the introduction of nemo dat exceptions, and its subsequent interpretation in the common law continues to “meet the needs of our own times” 12.
Since Bishopsgate, L.J. Denning’s sentiments can be claimed to be true, as demonstrated by the many cases that have seen successful applications of the nemo dat maxim and its exceptions for resolving sale of good title conflicts. One such notable case is Shogun Finance v Hudson, whereby a fraudulent rogue purchased a car from Shogun (a finance company) on a hire purchase agreement using a false identity (posing as a Mr. Patel), and later sold this car to Mr. Hudson, an innocent bona fide buyer, before disappearing 13. Shogun subsequently asserted their claim to the car as the true title owner under the nemo dat rule, whilst Mr. Hudson tried to rely on a nemo dat exception, s.27 of the Hire Purchase Act 1964, which stipulates that a bona fide purchaser can acquire good title from someone who has entered into a hire purchase agreement for a motor vehicle 14. The problem before the court was, therefore, to decide whether Shogun had entered into a valid agreement with the rogue, or whether this original agreement was void on the grounds of mistake 15. The House of Lords concluded that the original agreement was in fact between Shogun Finance and Mr Patel; not the rogue. Consequently, as the rogue had not entered into a hire purchase contract with Shogun, the title of the car did not pass, and Mr Hudson could not rely on s.27 exception 16. Therefore, one may contend that cases such as Shogun demonstrate the continuous strive for the law to protect true title owners’ property where they have been misled, reinforcing the importance of predictability and stability required for owners within modern-day sale of good transactions. As such, one may reasonably argue that reform of nemo dat is unnecessary; after all, why fix something that is not broken?
Reasons for nemo dat reform
However, in spite of the nemo dat rule providing the fundamental need to protect the rights of owners, many have criticised it as being outdated in modern commerce and trade, and as such, have called for its reform 17. One reason for this is because of its restrictive interpretation and the subsequent inconsistent judgements delivered by the courts, resulting from a “piecemeal” development of the nemo dat exceptions 18. This rigidity has arguably left bona fide third-party purchasers, entering into transactions in good faith, with a precarious legal standing because of the narrowly defined exceptions. One exception that demonstrates this is s.21(1), which includes the general legal doctrine of estoppel. The rule applies when a true owner represents to a third party that someone else has the authority to sell and pass title to a good 19, such in the way of words or conduct (whereby a true owner directly or indirectly indicates that another person has the authority to sell a good) or negligence (where a true owner’s carelessness with a good causes loss to a third party) 20. However, despite being an available exception, its application and scope is arguably extremely narrow, and, as stated by Lord Wright in Mercantile Bank of India Ltd, there are “very few actions for conversion whereby estoppel by representation has succeeded” 21. A more recent case highlighting this is Moorgate Mercantile v Twitchings, whereby the defendant bought a car from a third party, not knowing that it was subject to a hire purchase agreement between the third party and the claimant (a finance company) 22. The legal question was whether the claimant could be estopped from asserting their title to the car against the defendant who purchased it in good faith. To ascertain this, the court considered if the claimant’s failure to register the hire purchase agreement, which would have been viewable by the defendant, could be seen as a representation that the car was free to be sold 23. The court rejected the two estoppel claims by the defendant because they, firstly, decided that the claimant’s inaction to register the car did not amount to a misleading representation, and, secondly, the claimant owed no duty of care to inform other finance companies or dealers about the transaction 24. From this case, one may stipulate that this strict interpretation of the estoppel exception afforded too much protection to the true owner, which left the innocent third party vulnerable and without a valid claim 25. Additionally, one may state that it is not too burdensome to assign a level of duty of care to businesses, who often have significantly more resources than individual third parties, by requiring them to register their claim in a database accessible to third parties.
In addition to the estoppel exception, s.24 of the SGA 1979, known as the ‘seller in possession after sale’ exception, provides another example whereby a narrowly defined legal interpretation can leave a bona fide third party vulnerable 26. This exception applies where a seller ‘sells’ goods to one party, but before delivering on their contractual obligation to this first buyer, retains possession of the good, and instead delivers or transfers the good to another person as part of a separate sale 27. As a result, the s.24 exception was introduced to protect an innocent bona fide second buyer who can be deceived by a seller’s physical possession of a good, implying they also possess title ownership, and are unaware of the first agreement to sale. However, the reality of this legislative interpretation is that many legal nuances have left some innocent third parties vulnerable. For instance, s.24 does not require consent from the first buyer for a seller to continue to be in possession of a good or documents of title, so the seller can withhold possession of a good regardless of whether the first buyer decides to run the risk of a second sale 28. Additionally, there have been difficulties with the section’s scope and application. The courts have found it may only apply to situations where goods have been sold, instead of a mere agreement to sell 29. As such, innocent third parties depending on a sale assurance made by a seller, an arguably common practice in general commercial transactions, are left exposed by this small legal subtlety.
Therefore, from the above, one may contend that the exceptions to the nemo dat rule are overall inconsistent 30. Consequently, in spite of claiming to protect bona fide third parties, it may instead paradoxically hinder the fluidity of commercial transactions. Couple this with the English law’s ‘winner takes all’ approach that often culminates in outcomes starkly favouring one innocent party over another, the overall outlook is one that may deter third-party purchasers from engaging in transactions for fear of inadvertently acquiring goods without a clear title due to the exception’s uncertain and complex interpretation. This is perhaps the complete opposite aim of commercial law, which is premised on promoting and facilitating transactions amongst parties.
Proposed Reforms
To improve the current uncertainty created by the nemo dat rule and its exceptions, two significant reforms may be considered. The first involves a paradigm shift from the starting place of the law; to protect bona fide third-party purchasers as the default position 31. Tettenborn encapsulates this doctrine in what he has describes as an ‘entrustment principle’. The rule proposes that so far as a third party received a good bona fide from a seller, and that the true owner did not lose possession of this good against his or her will, the third party should succeed in a claim against the true owner 32. This proposal is linked to the idea that the risk associated with the transfer of goods should primarily lie with the party who has the original control over them, as they are best positioned to prevent fraudulent transactions; particularly business true owners who often have considerably more resources to that of a consumer 33. This change is aimed at enhancing the confidence of consumers in the market, thereby facilitating greater certainty within commercial transactions. However, this begs the question of whether an entrustment principle actually provides an improved solution to the current nemo dat rule, or if it simply shifts the problem from one party to another, rather than resolving it. To add to this, one could contend that bona fide third parties, especially in business-to-business transactions, could exert equal due diligence in verifying a seller’s trustworthiness.
The second reform advocates for a system of apportionment and shared accountability, replacing the current ‘winner takes all’ approach currently under nemo dat 34. This proposal was raised by Devlin LJ in the case of Ingram v Little, whereby he criticised this all-or-nothing approach, and instead advocated, in the cases of pure misfortune, “the loss should be borne equally” 35.Thus, as opposed to the current binary approach, an apportionment system acknowledges that in many cases involving fraudulent transactions, both parties may be victims and neither wholly at fault. Apportionment, therefore, recognises the complexities of modern transactions and aims to distribute losses more equitably. However, the idea of apportionment has also received criticism. One may assert that the fundamental problem with adopting any approach based on a matter-of-fact, case-by-case basis is that it makes the law more unpredictable, and the task of settling title disputes quickly and efficiently correspondingly harder 36. Furthermore, the Law Reform Committee has already rejected the idea of apportionment, based on the aforementioned decreased legal certainty, but also because they could see no reason why the innocence of an owner should be penalised in cases where both parties were simply unfortunate 37.
Conclusion
To conclude, this essay has aimed to present that the nemo dat rule, whilst providing legal certainty for the fundamental protection of true owners, might benefit from some level of reform. One may contend that, whilst there are many case examples that demonstrate the continued relevance of the maxim, it is arguably evident that some of the exceptions do not provide enough certainty for bona fide third-party purchasers. Consequently, this may be unknowingly subduing commercial transactions that might have otherwise occurred, which is the opposite intended purpose of commercial legislation. The first reform, for the case of sheer practicality in day-to-day transactions, proposes placing the initial protection on innocent third-party consumer purchasers, in conjunction with a entrustment principle, might present a more logical starting point for the flow of sale of goods. The second reform, despite its bureaucratic criticisms and resulting uncertainty, advocates for a system of loss apportionment, as it may better acknowledge the complexities of modern transactions involving multiple parties and cross-jurisdictional challenges. Ultimately, I propose the evolution of the nemo dat rule should reflect a commitment to efficiency and adaptability for the transfer of title resolutions, ensuring that it is suited for the increasingly fast-changing landscape of commercial practices in the world today.
Annotated Bibliography
1. David Fox et al, ‘Sealy and Hooley’s Commercial Law: Text, Cases, and Materials’.
This chapter provides a comprehensive overview of how an innocent third-party buyer can acquire good title to goods where the seller’s title is non-existent. Additionally, it provides a thorough explanation of the nemo dat maxim, alongside its various exceptions with supporting case material, including estoppel, sale under the Factors Act 1889, sale under a voidable title and sale by seller and buyer continuing in possession. Overall, the chaper provides a substantial foundation for those seeking an overview of the current law relating to title transfer disputes.
2. Battersby, Graham. ‘The Sale of Stolen Goods: A Dilemma for the Law’.
This article examines the legal complexities surrounding the sale of stolen goods. It primarily focuses on the tension between the ease of transfer and security of ownership in title conflict cases, and explores the challenges of the current nemo dat maxim which states that when stolen goods are sold, the law favours the original owner’s rights over those of an innocent purchaser unless there is a valid exception. It finalises with emphasising the need for balance and modernisation of the law as a result of the current inadequacies of legal frameworks such as the market overt rule and nemo dat maxim.
3. Foster, Angela. ‘Sale by a non-owner: striking a fair balance between the rights of the true owner and a buyer in good faith’.
This article addresses the legal challenge of determining the rightful owner of goods in cases involving sale by a non-owner. It demonstrates this using the case of Shogun Finance and the difficulty of balancing the rights of a true owner and an innocent buyer. It critically examines the nemo dat rule and explores each of its statutory exceptions in-depth, including estoppel, voidable titles, and sellers and buyers in possession after sale. Foster then proposes potential reforms for the nemo dat maxim, including for all purchasers to be protected, placing the initial risk on owners and apportionment. She concludes by reflecting on the need for legal reform to address the current inconsistencies in the nemo dat rule, advocating for strengthened consumer protection for future legal developments.
4. Merrett, Louise. ‘The Importance of Delivery and Possession in the Passing of Title’.
Merrett discusses the legal complexities in sale of good transactions related to the transfer of ownership, focusing on the roles of delivery and possession. The article explores how and when the title of goods passes from the seller to the buyer, examining the nemo dat rule and its exceptions involving mercantile agents and non-owner sales. It focuses primarily on the section 24 and 25 exceptions, and scrutinises the concept of actual and constructive delivery of goods, emphasising their questionable significance in determining rightful ownership in disputed cases. The paper concludes by highlighting the need for further clarity in the law regarding the transfer of title in relation to the two exceptions.
5. Tettenborn, Andrew. ‘Transfer of Chattels by Non-Owners: Still an Open Problem’.
This paper critically examines the current legal landscape regarding the transfer of personal chattels by individuals who do not own them. Tettenborn argues for a default rule of entrustment, suggesting that the onus of risk should lie with an original owner who is ‘entrusting’ another with their goods. The article states that the principle should apply to all proprietary interests, but should also be put-aside for exceptions in specific circumstances. Tettenborn concludes with three specific proposal aims to the nemo dat maxim to provide further coherence in a currently fragmented area of law.
Word count: 3059
Table of Authorities
Cases
Bishopsgate Motor Finance Corp v Transport Brakes [1949] 1 KB 322.
Ingram v Little [1957] 1 QB 31.
Mercantile Bank of India Ltd v Central Bank of India Ltd [1938] AC 387.
Shogun Finance Ltd v Hudson [2003] UKHL 62, [2004] 1 AC.
Legislation
Hire Purchase Act 1964.
Sale of Goods Act 1979.
Bibliography
Books
Bridge, Michael G., and Benjamin, Judah Philip. Benjamin’s Sale of Goods (12th edn. London: Sweet & Maxwell, 2020).
Fox, David, Roderick Munday, Baris Soyer, Andrew Tettenborn, and Peter Turner. Sealy and Hooley’s Commercial Law: Text, Cases, and Materials (6th edn. Oxford: Oxford University Press, 2020).
Journal Articles
Battersby, Graham. ‘The Sale of Stolen Goods: A Dilemma for the Law.’ The Modern Law Review 54, no. 5 (1991) 752-757.
Diamond, Aubrey L. ‘Law Reform Committee: Twelfth Report on the Transfer of Title to Chattels.’ The Modern Law Review 29, no. 4 (1966) 413-419.
Foster, Angela. ‘Sale by a non-owner: striking a fair balance between the rights of the true owner and a buyer in good faith.’ Coventry Law Journal 9, no. 2 (2004) 1-15.
Merrett, Louise. ‘Is Possession Nine Tenths of the Law in the Sale of Goods?’ Cambridge Law Journal 69, no. 2 (2010): 236-238.
Merrett, Louise. ‘The Importance of Delivery and Possession in the Passing of Title.’ Cambridge Law Journal 67, no. 2 (2008) 376–395.
Tettenborn, Andrew. ‘Transfer of Chattels by Non-Owners: Still an Open Problem.’ Cambridge Law Journal 77, no. 1 (2018) 151–178.
1 Sale of Goods Act 1979, s 21(1).
2 David Fox et al, Sealy and Hooley’s Commercial Law: Text, Cases, and Materials (6th edn, Oxford University Press 2020) 356.
3 Graham Battersby, ‘The Sale of Stolen Goods: A Dilemma for the Law’ (1991) 54(5) The Modern Law Review 752.
4 Louise Merrett, ‘Is Possession Nine Tenths of the Law in the Sale of Goods?’ (2010) 69(2) Cambridge Law Journal 236.
5 ibid.
6 Sale of Goods Act 1979, s 21(1).
7 ibid ss 21-26.
8 Angela Foster, ‘Sale by a non-owner: striking a fair balance between the rights of the true owner and a buyer in good faith’ (2004) 9(2) Cov. L.J. 1, 2.
9 ibid.
10 Andrew Tettenborn, ‘Transfer of Chattels by Non-Owners: Still an Open Problem’ (2018) 77(1) Cambridge Law Journal 151, 156.
11 Bishopsgate Motor Finance Corp v Transport Brakes [1949] 1 KB 322, 337.
12 ibid.
13 Shogun Finance Ltd v Hudson [2003] UKHL 62, [2004] 1 AC, 919 [D].
14 Hire Purchase Act 1964, s 27.
15 Shogun Finance Ltd v Hudson [2003] UKHL 62, [2004] 1 AC, 919 [F].
16 Angela Foster, ‘Sale by a non-owner: striking a fair balance between the rights of the true owner and a buyer in good faith’ (2004) 9(2) Cov. L.J. 2.
17 Louise Merrett, ‘The Importance of Delivery and Possession in the Passing of Title’ (2008) 67(2) Cambridge Law Journal 376, 377.
18 Louise Merrett, “Is Possession Nine Tenths of the Law in the Sale of Goods?” (2010) 69 Cambridge Law Journal 236, 238.
19 Sale of Goods Act 1979, s 21(1).
20 Angela Foster, ‘Sale by a non-owner: striking a fair balance between the rights of the true owner and a buyer in good faith’ (2004) 9(2) Cov. L.J. 2.
21 Mercantile Bank of India Ltd v Central Bank of India Ltd [1938] AC 387, 302.
22 Moorgate Mercantile Co Ltd v Twitchings [1977] AC 890, [D].
23 ibid, 890 [H].
24 ibid, 899 [E].
25 Angela Foster, ‘Sale by a non-owner: striking a fair balance between the rights of the true owner and a buyer in good faith’ (2004) 9(2) Cov. L.J. 1, 3.
26 ibid.
27 Sale of Goods Act 1979, s 24.
28 Michael G Bridge and Benjamin Judah Philip, Benjamin’s Sale of goods (12th edn, London: Sweet & Maxwell 2020)7-056.
29 ibid,7-054.
30 Louise Merrett, ‘The Importance of Delivery and Possession in the Passing of Title’ (2008) 67(2) Cambridge Law Journal 376, 377.
31 Angela Foster, ‘Sale by a non-owner: striking a fair balance between the rights of the true owner and a buyer in good faith’ (2004) 9(2) Cov. L.J. 1, 6.
32 Andrew Tettenborn, ‘Transfer of Chattels by Non-Owners: Still an Open Problem’ (2018) 77(1) Cambridge Law Journal 151, 158.
33 Angela Foster, ‘Sale by a non-owner: striking a fair balance between the rights of the true owner and a buyer in good faith’ (2004) 9(2) Cov. L.J. 1,6.
34 ibid, 7.
35 Ingram v Little [1957] 1 QB 31, 73.
36 Andrew Tettenborn, ‘Transfer of Chattels by Non-Owners: Still an Open Problem’ (2018) 77(1) Cambridge Law Journal 151, 160.
37 Aubrey L. Diamond, ‘Law Reform Committee: Twelfth Report on the Transfer of Title to Chattels’ (1966) 29(4) The Modern Law Review 413, 414.
