Commercial Law: Philip Rawlings

Commercial law
Philip Rawlings
2007
LLB 2660017
page University of London External Programme
This subject guide was prepared for the University of London External Programme by:
 Philip Rawlings, Professor of Law and Graduate Tutor, Faculty of Laws, University College
London.
This is one of a series of subject guides published by the University. We regret that owing
to pressure of work the authors are unable to enter into any correspondence relating to,
or arising from, the guide. If you have any comments on this subject guide, favourable or
unfavourable, please use the form at the back of this guide.
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Commercial law page
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2 Agency 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3 Agency 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
4 Sale of goods: contract, property and risk . . . . . . . . . . . . . . . . . 55
5 Sale of goods: performance and implied terms . . . . . . . . . . . . . . 83
6 Sale of goods: acceptance, remedies and retention of title . . . . . . . 109
7 International sale contracts . . . . . . . . . . . . . . . . . . . . . . . 125
8 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Feedback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
1 Introduction
Contents
1.1 Commercial law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.2 Learning outcomes for commercial law . . . . . . . . . . . . . . . . . . 9
1.3 Approaching your study . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.4 The examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Introduction
This subject guide provides a structure for your study of commercial law. It gives an over- You need to open a notebook
view of the various topics of which this course is comprised and is a guide to the essential or ring binder for this subject.
and further reading materials. It is not a substitute for those reading materials. You should This will be for recording
work through each chapter and the associated readings and you should undertake the answers to activities and
activities as a means of deepening your understanding of the subject. At the end of each making working notes. It is
chapter, you should pause to consider whether you have achieved the learning outcomes. not the same as your Skills
portfolio, which should
While commercial law is based in contract law, it also includes elements of tort, equity
contain the evidence that you
and property law. The resources on which a commercial lawyer draws include legislation,
are acquiring learning and
cases and international agreements. This course, therefore, builds on knowledge acquired
legal skills.
through your study of law and it develops your skills of analysis and synthesis.
Please note that this syllabus has been revised from that originally published in 1999
(with subsequent updates). In those topics that have been retained, some issues are no
longer covered (e.g. the discussion of the regime covering commercial agents has been
almost entirely removed) or there has been a change of emphasis.
Learning outcomes
By the end of this chapter and the relevant readings, you should be able to: For more help on studying
 approach the study of commercial law in a systematic way successfully, and undertaking
activities, see the Learning
 understand how this subject guide is organised and the various elements of which it is
skills for law guide.
comprised
 understand how to develop your learning skills
 understand how to approach the examination.

Commercial law 1 Introduction page
1.1 Commercial law

Commercial law is a dynamic and exciting area. It must be flexible in order to keep pace
with the rapid changes in business and with the globalisation of markets. At the same time,
it must deliver the certainty that business requires.
Commercial law is a subject that is difficult to define. It encompasses the law that applies
to business and includes contract, company law, agency, sale of goods, banking, intel-
lectual property, competition law, taxation law and insurance. This course does not seek
to cover all of these subjects. The object is to look at certain areas in order to acquire an
understanding of the main themes, principles and practices of commercial law.
This course is, therefore, organised around the contract of sale. In this it reflects the view of
one leading writer, Professor Sir Roy Goode, who remarked that commercial law comprises
‘that branch of law which is concerned with rights and duties arising from the supply of
goods and services in the way of trade’ (Goode, p.8). The syllabus† comprises: †
For a set of learning outcomes
 the law of agency relating to the syllabus, see
section 1.2.
 the law of sale of goods
 the law of international sale of goods
 the law relating to payment by documentary credits.
By this stage, you might have reached the view that commercial law is not a separate sub-
ject, but a number of distinct areas of law that have been gathered together. Indeed, you
might, with Professor Goode (p.1203), ask, ‘Does commercial law exist?’ This is a question
that you should think about while you are studying. Unlike many jurisdictions, there is no
commercial code in English law.
The roots of modern commercial law can be traced to the lex mercatoria or ‘law merchant’
(see Sealy and Hooley, Chapter 1, section 3, pp.14–19). This was, broadly, the law applied
by merchants in their own courts. Those courts did not necessarily apply domestic law to
international trade. The rules developed in these courts were incorporated into the com-
mon law, particularly by judges such as Sir John Holt and Lord Mansfield in the seventeenth
and eighteenth centuries. Attempts to codify this mass of case law in the late nineteenth
century produced the Bills of Exchange Act 1882, the Sale of Goods Act 1893, the Marine
Insurance Act 1906 and the Partnership Act 1890, all of which either remain in force or con-
tinue to influence current law. Since these statutes arose out of the decisions of the courts
(even if they did not always reproduce those decisions), they tended to reflect the fact
that the bulk of those decisions concerned disputes between merchants. This meant that,
broadly speaking, the legislation did not seek to interfere with the freedom of merchants
to make contracts and to organise their business as they saw fit.
Yet this view of contract law as not intervening cannot be taken too far. The 1893 Sale of
Goods Act placed various obligations on sellers and buyers, including implied terms as
to description and quality (see Chapter 5). Moreover, even if non-intervention tended to
dominate the development of the law relating to contracts of sale, there had always been
an element of consumer protection through the criminal law, which imposed penalties for
false measures and the adulteration of food and drink. By the second half of the twentieth
century there was pressure to improve protection for consumers, not just through the
criminal law, but also through the strengthening of consumer rights. This led to legisla-
tion that sought to regulate various aspects of the relationship between consumers and
merchants:
 the contract itself (e.g. the Unfair Contract Terms Act 1977)
 the goods and services supplied (e.g. regulating the production of certain types of goods to
improve safety and quality)
 the merchants who supplied particular goods and services (e.g. through licensing).
The aims were to provide consumers with additional rights, to prevent certain goods and
services from reaching the marketplace, and to control suppliers.
Clearly, the objectives of the law relating to transactions between merchants (commercial Go to your study pack and
law) are likely to differ from those relating to transactions between merchants and con- read ‘Rule, practice, and
sumers. Yet, there is no clear distinction between commercial law and consumer law. So, pragmatism in transnational
for instance, these different types of transactions are mixed together in the Sale of Goods commercial law’ by Roy
Act 1979 (see Chapters 4–6). Many have, therefore, argued for the creation of separate Goode.
codes of law for commercial sales and for consumer sales (Bridge (2003) 119 LQR 173). This
subject guide is concerned only with commercial sales.
The other problem is that the incorporation of the lex mercatoria into the common law
meant that it lost its international flavour. This has prompted a call for the harmonisation
of rules relating to international sales. Within the European Union some strides towards
such harmonisation have been made (although much of the focus has been on consumers).
More broadly, various international treaties and conventions have been drawn up, which
seek to bring some unity to international commercial law. It does not take much thought
to recognise the difficulty of constructing international agreements on such issues and
also the problems of domestic courts around the world in applying such agreements with
any consistency. More successful, perhaps, are the various standard form contracts issued
by international trade organisations and adopted by merchants (e.g. see Chapter 7). For
further discussion of all of these issues, read Sealy and Hooley, pp.14–20, 33–34, 43–58. See
also Bradgate, pp.3–20. On these texts, see section 1.2.1 below.
Commercial law 1 Introduction page
1.2 Learning outcomes for commercial law

When you have finished studying this module, you should be able to demonstrate that you
have studied in depth agency, sale of goods, international trade and finance and principles
of secured financing.† †
Note: Students will be expected
to be familiar with the principles
a Agency
of bailment so far as is necessary
 define the term ‘agent’
for a complete understanding of
 explain how an agency is created
the topics within the syllabus.
 discuss the scope of the agent’s authority
 explain the rights and obligations owed by the principal and by the agent to the third party
 explain the rights and obligations owed by the third party to the principal and to the agent
 explain the rights and obligations arising between the principal and the agent.
b Sale of goods Moving from knowledge to understanding

 discuss the approach taken to interpre- In studying for a qualifying law degree, such as the University of
tation of the Sale of Goods Act 1979 London’s LLB, you need to begin with knowledge and develop under-
 analyse the components of the definition standing and the deeper skills required of law graduates. A lawyer
of a contract of sale needs to know (or know where to find) the law. He or she also needs
 explain the circumstances in which prop- to analyse an infinite variety of real-life problems and apply the law
erty in goods is passed critically to them. To do this you must:
 identify how risk is passed
 understand the law
 understand the nemo dat rule
 discuss and illustrate the exceptions to  have analytical and critical abilities.
nemo dat rule To be analytical and critical you need to develop:
 explain the duties of the seller to deliver  autonomy and an ability to learn
and the buyer to accept goods
 a reflective approach to your learning
 discuss the implied terms in ss.12–15 of
the Sale of Goods Act 1979  the ability to identify and retrieve legal information from paper and
 discuss the relationship between the online sources.
different implied terms The learning outcomes and activities which we provide in our subject
 outline the limits imposed on attempts guides enable you to do develop these skills. There is a simple chart
by the seller to exclude or restrict liabil- which expresses the process:
ity for breach of the implied terms
 understand and discuss the rules on Derived from
the syllabus Knowledge base
acceptance
 explain the remedies available to the
buyer and the seller where there is a
breach of the sale contract Learning Learning activities and
 explain the use of retention of title outcomes sample examination
clauses and the limits of such clauses. are the basis questions develop skills and
of learning understanding and embed
c International sale contracts
activities knowledge in your memory.
 identify the key characteristics of cif and
fob contracts
 analyse the distinctions between cif and
fob contracts You demonstrate your
 discuss the duties of the seller and buyer understanding and skills
under cif and fob contracts in your answers to activities
This is assessed
 explain the remedies available to the sell- and sample examination
by portfolio
er and buyer under cif and fob contracts questions written in your
assessment and
 understand the general issues involved in notebook or ring binder
examinations
the use of electronic documentation and for the subject guide, and
the effect of international agreements on by entries in your Skillls
the terms of international sale contracts. portfolio.
d Payment
 define and identify the characteristic features of a documentary credit
 explain the significance of the Uniform Customs and Practice for Documentary Credits (UCP)
 identity the different types of documentary credit
 explain the steps involved in the opening of a credit
 analyse the various contractual relationships
 discuss the strict compliance and autonomy of the credit rules
 explain the rights and obligations of the parties.
page 10 University of London External Programme
1.3 Approaching your study

This guide is designed to direct you through your study of commercial law. You should
work through each chapter in turn. The guide has been written to enable you to build
up your knowledge. Each chapter is written on the assumption that you have read and
understood previous chapters. You should not, therefore, dip into the guide: your aim is to
understand the whole subject. This requires the ability to stand back and see the structure
of commercial law. Indeed, you will find it much easier to understand and remember cases
and statutes if you can see them as part of this larger structure rather than treating them as
unconnected rules. Commercial law has its eccentricities, but, overall, it works because it
has been built up in response to the needs and practices of business people.
You should read each chapter carefully. In each chapter there are activities, which provide
an opportunity to think about and learn to understand the material you have been cover-
ing. You should work through these activities before referring to the feedback at the end
of each chapter. Next, you should read the essential reading, and then look at the cases
and further reading. Make sure you understand each piece of reading and each case before
moving on. If you do find a case or piece of reading difficult to understand, go back to
the subject guide or move on and return to the piece of reading or case later. Reflect on
whether you do understand each part fully. Ask yourself difficult questions. Finally, you
should attempt the sample examination question at the end of each chapter.
Commercial law is a rapidly developing area, so you must keep up to date. How you can do
this is discussed below. Access to a good law library is, of course, very helpful, but for those
who do not have such access the Internet provides a rich source of information, if it is used
carefully.
1.3.1 Essential reading

Commercial law textbooks fall into two broad groups: those books that seek to cover a
wide area of the subject and those that focus on a particular topic, such as agency or sale.
Primary textbook
 Sealy, L.S. and R.J.A. Hooley Commercial law: text, cases and materials. (London: LexisNexis
Butterworths, 2003) third edition [ISBN 0406950032].
This book will be referred to throughout the guide. It resembles a portable library in
that it contains extracts of leading cases, legislation, articles and editorial commentary.
References to ‘Sealy and Hooley’ are references to this textbook. Throughout the book the
authors ask questions, which you should attempt to answer.
Much of your study will be devoted to the readings from this book, although at various
points you will be directed to other materials. You should also try to read as many of the
leading cases in their original form. Remember that, while this excellent book has been
compiled by two of the leading commercial lawyers, it is only their particular view of what
is important.
Other texts to consult

There are various excellent books on the general area of commercial law to which refer-
ence will be made in this guide.
 Goode, R. Commercial law. (London: Penguin Books, 2004) third edition

[ISBN 9780140289631].
This is an important work by one of the leading commercial lawyers of the last thirty years.
It will be referred to as ‘Goode’ throughout this guide.
 Bradgate, R. Commercial law. (London: LexisNexis Butterworths, 2000) third edition

[ISBN 9780406916039].
 Brown, I. Commercial law. (London: LexisNexis Butterworths, 2001)

[ISBN 9780406024340].
In addition, there are books that cover particular aspects of commercial law. These are
referred to in the relevant chapters.
Commercial law 1 Introduction page 11
Statute books
Legislation is frequently amended, so it is important to refer to up-to-date versions of legis-
lation. It is, therefore, convenient to have a statute book in addition to the other books.
 Rose, F. Blackstone’s statutes: commercial & consumer law. (Oxford: Oxford University Press).
A new edition is published each year.
Legal journals
The subject guide and the textbooks refer to articles published in various journals in the UK
and abroad. You should try to read those referred to in the subject guide, but you should
also try to follow up references to journal articles cited in the textbooks where appropriate.
1.3.2 Web sites

Used with care, the Internet is a valuable resource.
Cases and legislation:

 http://www.bailii.org/ The British and Irish Legal Information Institute: an excellent site that
provides access to full texts of cases and legislation from Britain and Ireland. It also has links
to sites for other jurisdictions.
Recent UK legislation is also available through a government site:

 http://www.opsi.gov.uk/legislation/about_legislation.htm
Judgments of the House of Lords since 1996 are also available from:
 http://www.publications.parliament.uk/pa/ld/ldjudgmt.htm
The skills required to become a graduate

Learning skills are important, though mostly underemphasised. Please refer to
the guide Learning skills for law.
Needed: deep learning These are some of the ‘deep learning’ skills that we expect you to acquire. The
Many of the answers we ability:
receive in the assessment  to discern themes and patterns in large amounts of disparate information
every year appear to reflect
 to scan large amounts of written materials to draw out argumentative threads
surface learning and not
deep learning.  to explain the different sides of a controversial issue
Are you prepared to take on  to make, apply and criticise precise distinctions
the challenge?  to separate rapidly the relevant from the irrelevant
 to think logically
 to think critically
 to research
 to plan
 to communicate, to argue fluently, concisely and persuasively, both orally and on
paper
 to concentrate, working with speed and stamina
 to work independently with initiative and self confidence
 to work co-operatively, to lead and to support with sensitivity.
Self-reflective skills are also essential – the ability:
 to learn from experience
 to gauge how the learning experience is working and to identify weaknesses
 to use the above skills to evaluate your knowledge
 to use those skills to analyse and solve problems.
As you progress with your studies, you should be thinking about how you can
develop these skills.
1.3.3 Use your Portfolio/Learning Journal

Throughout this guide you will notice certain portfolio prompts. In the London programme
we have a portfolio that any student who wishes to obtain a QLD for England and Wales
must develop and present for assessment in their final year. This is to ‘demonstrate’ the
subject specific and transferable skills students will attain. We are not saying that students
who do not complete a portfolio do not have these skills but such students will not
formally have demonstrated these skills in an assessed mode. From your second year you
should use the online e-portfolio system to compile your evidence base and reflection on
your evidence. However, by portfolio we also mean something more simple – a learning
journal which would be a worthwhile experience, whether or not you are going to submit
your Skills portfolio for assessment, to build. This can be as simple as a ring leaf folder,
making entries in this will give the opportunity to reflect on your learning, to map out the
process and gauge whether you are meeting the learning objective for the subject.
The important aspect here is reflection: in the other first year subject guides you may find
reflection prompts rather than portfolio prompts but what unites these is the belief that
reflection is necessary for authentic self-understanding and learning processes that last.
Throughout the guide we will give prompts, indicated by this symbol: Begin your portfolio
or learning log by putting
At the end of each chapter (with the exception of this one) there is an opportunity for you
down some notes as to
to reflect on and review your understanding of the issues contained in that chapter. You
the main messages in this
are strongly advised to carry out this review and to go over any points which you still feel
chapter. In distance learning
unsure about before proceeding to the next chapter.
the institution – here London
– teaches through the
learning resources. We try
to communicate with you
through the messages in
this and the other texts and
online materials we make
available to you. What are
the main messages in this
chapter?
Commercial law 1 Introduction page 13
1.4 The examination

Important: the information and advice given in the following section is based on the
examination structure used at the time this guide was written. However, the University can
alter the format, style or requirements of an examination paper without notice. Because of
this, it is essential for you to check the instructions on the paper you actually sit.
1.4.1 Preparation
You need to start your examination preparation at the beginning of the course and not
leave it until the period just before the examination starts. As you proceed through your
studies you should try to summarise the key points in each section. The sample examina-
tion questions in this guide will give you some indication as to how to approach different
types of examination questions, but there is no substitute for practice. You should, there-
fore, practice old LLB examination questions.† Put yourself under examination conditions. †
These are available from the Laws
Give yourself only 45 minutes to answer each question, including reading of the question web site.
and planning time. Do this throughout your course to familiarise yourself with writing
examination answers.
You should plan out each week of study in advance using a diary allowing at least eight
hours of study for commercial law each week. You should also allow time for a review of
the week’s work and at the end of the month allow some time for a wider review of what
you have achieved in the preceding month. At the same time, you need to balance your
studies. You will not be able to study or to perform in the examination, unless you are
physically and mentally well, so do not overwork. It is important that you take time away
from your studies.
Two months before the examination you should draw up a revision schedule. At this point
you should have a good set of notes from which to revise. Students are often tempted to
try to guess what questions will appear on the examination paper on the basis of previous
years and limit their revision to those topics. This is always dangerous because you limit
the choice of questions that you can do and because examiners can mix different topics
into one question: e.g. an agency issue may be mixed in with a question on a sale contract.
It is also dangerous to try to identify the format of future examination papers on the basis
of past commercial law papers because, as has been mentioned, this guide introduces a
slightly revised course.
1.4.2 On the day of the examination

Try to make sure that you take the night before the examination off and do something
relaxing. If you have to revise make sure you finish at a reasonable time, do something
else and then get a good sleep. Remember that your brain can get tired, like your body. If
you ran a marathon you would not expect to be able to repeat the exercise the next day.
The same is true of the brain: if you exhaust yourself the day before, you are likely to find
yourself unable to perform in the examination. On the morning of the examination go over
your revision notes briefly then go to the examination without them. Make sure you give
yourself plenty of time to travel to the examination. It is also advisable to eat and drink
normally before an examination.
When the examination starts read the whole paper question by question very carefully and
then decide which questions to attempt. Take your time over this. Do not just pick your fa-
vourite topic: consider whether another question is easier to answer even though it might
not be your favourite topic. Make sure that you attempt four questions. Before you begin to
write your answers, make a brief plan about how you will answer each question.
It is important to be strict with yourself about how much time you spend on each question.
Do not make the mistake of giving yourself too little time to answer the last question.
Allow 5–10 minutes to read the examination paper and then 40 minutes for each question,
including 5 minutes for planning your answer. Do not go over this 40 minute time limit.
Students often fail to realise that it is much harder to improve your mark on a question that
you have been answering for 40 minutes than to score marks on a new question. At the end
you will have about 10 minutes to go over your answers.
1.4.3 Answering the question

It cannot be emphasised enough that you must answer the question that has been asked
and not one that you hoped would have been asked. You may get no marks at all or serious-
ly endanger your ability to pass a question if you do not observe this simple rule. You must
ask yourself, ‘What is this question seeking to discover?’ It will be rare for you to be asked
simply to describe an area of law or provide a list of rules. As a lawyer you are being tested
on your ability to analyse and to argue. Lawyers do not provide unsubstantiated opinion,
they reason from authority. They acknowledge the weaknesses and strengths in the argu-
ments they present. They are also looking to see how the law might develop.
In general you will encounter two types of questions, the problem and the essay. The
sample examination questions at the end of each chapter in this guide provide illustrations
of both types and in the feedback to those questions you will find guidance about the ap-
proach you should take in answering them.
In problem questions you are required to apply the law to the facts of the question. Work
through each word of the problem. Identify the issues and apply the relevant law to them.
If you think there is absolutely nothing of interest in a sentence, you may well have missed
the point. The other difficulty with problem questions is that the law may be uncertain or
you may not be given quite enough facts. This requires you to discuss the various possibili-
ties. Where appropriate, you can point out defects in existing rules. Finally, the question
may ask you to advise a particular person identified in the problem. This simply means that
you should answer the question by looking at it from the perspective of that person: do
not, as some students do, write this person a letter.
While problem questions lead you to the areas of law that the examiner wishes you to dis-
cuss, essay questions provide more scope for discussion. You need, therefore, to be careful
to focus on the question being asked. You must identify what it is that the essay question
is seeking. Often you are invited to discuss an assertion about the state of the law. Do not
simply say to yourself, ‘Oh good! This is a question on the nemo dat rule and its exceptions’,
and then set about a description of the rule and the exceptions. It is unlikely that this is
what the question is asking you to do. (See Chapter 4 for the nemo dat rule and a sample
examination question).
Whether it is a problem or an essay question, you should constantly ask if you are answer-
ing the question that has been asked.
Finally, a lawyer argues from authority (case, statute, academic writing, etc.) and you must
cite the authorities on which you rely. You do not need to give the actual reference of the
source as long as you make it clear which source you are using (e.g. providing the name
of a case without giving its date or report reference is enough). Students often worry
about how many cases, statutes, etc. they should cite. Studying commercial law does
involve reading a lot of cases, but in the examination do not try to impress the examiner
with a long list of case names. Often a point can be made through citing one or two cases.
Remember that the examination primarily tests your understanding of the issues and not
your ability to memorise dozens of case names.
Reminder of learning outcomes

By this stage you should be able to:
 approach the study of commercial law in a systematic way
 understand how this subject guide is organised and the various elements of which it is
comprised
 understand how to develop your learning skills
 understand how to approach the examination.
2 Agency 1
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.1 What is an agency? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.2 Types of agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.3 Creation of agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.4 Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.5 Actual authority of the agent . . . . . . . . . . . . . . . . . . . . . . . 26
2.6 Agency by estoppel and apparent authority . . . . . . . . . . . . . . . 28
2.7 Usual authority: Watteau v Fenwick . . . . . . . . . . . . . . . . . . . . 31
2.8 Ratification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.9 Agency of necessity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
2.10 Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Introduction
The law of agency is an essential part of commercial law because companies can only
conduct business through agents. The function of the law of agency is to enable agents to
bring commercial parties into contractual relations in such a way as to render those parties
– and not the agents – liable on, and able to enforce, the contract.
The principal, on whose behalf the agent is bargaining, must be able to place complete
confidence in the agent. This has led the law of agency to make the agent a fiduciary, which
imposes strict obligations. However, there are interests other than the protection of the
principal against misuse of power by the agent: the protection of the third party with
whom the agent has dealt, the protection of the agent against any liability incurred on
behalf of the principal, and the rights an agent may have against the principal.
Since this course is centred on the sale of goods, the focus is on those aspects of the law of
agency that enable such transactions to occur. This means that the focus will be on princi-
pal-third party and third party-agent relations. There will only be a very brief consideration
of the rights and duties owed between the agent and the principal. This chapter deals with
the creation of an agency and the scope of the agent’s authority; Chapter 3 discusses the
rights of the various parties.
The main reading is Sealy and Hooley, but you might also consult Bradgate, pp.125–75.
Learning outcomes How to succeed with the London package

By the end of this chapter and the relevant read- There are a number of vital factors you need to consider.
ings you should be able to: Begin with learning outcomes.
 define the term ‘agent’ Learning outcomes – or objectives – have a particular role in
 explain how an agency is created distance learning. Traditional syllabuses talked only of the
content to be covered; lecturers/tutors talked of the dates
 discuss the scope of the agent’s authority.
on which topics would be covered. The role of learning out-
comes is to make clear what learners are expected to be able
to do and what they are expected to achieve.
In our materials you will be told the intended objectives, in a
set of outcomes at the beginning of each chapter.
You will meet these outcomes again on the ‘reflect and
review’ pages at the end of each chapter. There you can con-
sider whether you have attained the outcomes, and whether
you should revise the chapter, or proceed to the next one.
Commercial law 2 Agency 1 page 17
2.1 What is an agency?
Essential reading
¢ Sealy and Hooley, Chapter 3: ‘Introduction’ (To Part II: ‘The law of agency’) pp.97–105.
2.1.1 Introduction
Most people might agree with Lord Alverstone CJ when he defined an agent as ‘any person
who happens to act on behalf of another’ (The Queen v Kane [1901] 1 QB 472), but Sealy and
Hooley, p.97, caution that, ‘Any concise definition of the concept of agency must be treated
with care. Striving for brevity, the definition is likely to be flawed by errors and omissions
which may make it misleading.’
If P (the principal) instructs A (the agent) to act in the purchase of goods from T (the third
party seller) in the sale of those goods, the contract of sale that is made by A is enforceable
between P and T. In general, A has no liability to either P or T on that contract:
where a person contracts as agent for a principal the contract is the contract of the princi-
pal, and not that of the agent; and, prima facie, at common law the only person who may
sue is the principal, and the only person who can be sued is the principal. (Montgomerie
v United Kingdon Mutual Steamship Association [1891] 1 QB 370, Wright J; Sealy and Hooley,
pp.147–8.)
†
There are three parties: P, A and T, and three relationships †: Three relationships:
 the relationship between P and A
 the relationship between A and T
P
 the relationship between P and T.
The picture may be more complex than this because T is likely to use an agent and the
agents of P and T may be permitted to use sub-agents. Furthermore, one party may be A T
simultaneously agent and principal: in Aluminium Industrie Vaassen bv v Romalpa Aluminium
Ltd [1976] 1 WLR 676, under a contract of sale on credit, S (seller) reserved title in the goods
and required B (buyer) to account to S for the proceeds of any resale of those goods. This
meant that on resale B was an agent for S and under an obligation to account for the resale
proceeds, but B was also a principal in relation to the new buyer (on reservation of title see
Chapter 6 section 6.3 of this subject guide).
An agent who acts outside the authority † granted by the principal will be in breach of the †
We discuss the authority of the
contract (if there was one) by which the principal appointed the agent, but, in spite of this, agent to bind the principal in
the principal may be bound to the third party. This is because the authority with which the section 2.5.
agent has been clothed by the principal determines the relationship between the principal
and the third party. That is, the principal will be liable to the third party if the principal
represented that the agent was acting within their authority (apparent authority).
This means that the question of whether or not the principal is bound to a third party does
not depend on the actual authority granted by the principal to the agent. It depends on
the apparent authority of the agent (also known as the ostensible authority of the agent).
The apparent authority is that authority which the agent appears to possess because of
representations made by the principal to the third party.
If the third party knows the limits of the agent’s actual authority, there is no difficulty and
the apparent authority will be the same as the actual authority of the agent. However, the
third party will, usually, not know the terms of appointment of the agent and must rely on
the apparent authority.
We will revisit all of these issues in this chapter.

2.1.2 Theories
There are three main theories that seek to define and explain the role of the agent. Using your notebook or ring
binder You could make
Power-liability theory brief notes on power-liability
It has been suggested that an agency relationship exists when a person (the agent) theory, consent theory and
acquires the power to alter the principal’s legal relations with a third party in such a way qualified consent theory.
that it is only the principal who can sue, and be sued by, that third party. This focuses on
the external relationship with the third party and ignores the internal relationship between
the principal and the agent. It also excludes many who are commonly called agents. Estate
agents introduce buyers to sellers without, usually, having any power to bind either party;
nevertheless, they are subject to fiduciary duties (see section 3.3) in the same way as agents
narrowly defined and some of the key cases in agency law have concerned estate agents. It,
therefore, seems odd to exclude them from a definition.
Consent theory
According to the US Restatement (Third) of Agency (Tentative Draft No. 2) (2003), § 1.01:
Agency is the fiduciary relationship that arises when one person (a ‘principal’) manifests
assent to another person (an ‘agent’) that the agent shall act on the principal’s behalf and
subject to the principal’s control, and the agent manifests assent or otherwise consents
to act.
In focusing on the fiduciary duty that an agent owes a principal there is recognition that
agency exists only where someone is undertaking more than merely ministerial † functions †
Ministerial = where the agent
(see 2.4.1). In other words, the agent must have been invested with a degree of discretion merely follows the instructions
that shows the principal has placed trust and confidence in the agent. It is this which gives of the principal precisely and has
rise to a fiduciary duty. Yet, this definition has problems: no discretion, that is, no choice
 by placing attention on the internal relationship between principal and agent, the external over what course of action to
relationship with the third party is ignored take on the principal’s behalf.
 not all agency relationships require the assent of the parties: an agency of necessity is cre-
ated without the consent of the principal (see 2.9)
 consent or assent is only required in a special sense. Lord Pearson remarked:
The relationship of principal and agent can only be established by the consent of the
principal and the agent. They will be held to have consented if they have agreed to what
amounts in law to such a relationship, even if they do not recognise it themselves and
even if they have professed to disclaim it (Garnac Grain Co Inc v H M F Faure & Fairclough Ltd
and Bunge Corpn [1968] AC 1130).
Whether or not the principal and agent consented to the creation of an agency is de-
termined by an objective standard. The law is not concerned with the principal’s or the
agent’s opinions, but takes an objective view of the words and actions of the parties: would
the reasonable person conclude that an agency existed?
An agency may exist where P represents to T by actions or words that A has authority to act
as an agent and T has acted on that representation (see section 2.6).
Qualified consent theory

This combines the consent theory with the protection of ‘misplaced reliance’ to account Go to your study pack
for actual and apparent authority (see sections 2.5, 2.6). Ratification (see section 2.8) and read ‘Philosophical
reflects commercial reality since ‘authorisation… may not always be neatly contemporane- foundations of the law of
ous with the initial transaction.’ (G. McMeel, see Sealy and Hooley, pp.100–102) agency’ by Gerard McMeel.
Activity 2.1
Distinguish between ‘power’ and ‘authority’ in the context of agency. (See Sealy and
Hooley, pp.98–102).
Speech
The ability to express yourself on legal topics in English is a vital part of this
course. It is an essential element of your Skills portfolio.
How to you become skilled at speaking in English? By doing it and practising.
There are four main elements to speaking successfully:
 the words
 the structure
 the arguments
 the delivery.
The words
 Make full use of your English legal vocabulary. Remember that the words need to
fit into meaningful sentences. You can find most of the words you will need in this
chapter.
 However, you must not simply repeat sections of the chapter. The aim is to
express yourself in your own words.
The structure
It will help you to formulate your arguments, and help your audience to under-
stand them, if you use a BME structure (beginning, middle and end).
 At the Beginning: explain what you are going to be talking about, and the main
points in your argument.
 In the Middle present the main elements of your argument
 At the End, describe your conclusions, and briefly summarise the reasons you
have given in your arguments.
The middle is always the major part of your presentation.
The arguments
You could begin by explaining:
 how and when the common law and civil law systems developed
 in which countries they have been adopted
 Then you need to:
 summarise the key characteristics of each system
 explain the different roles played by judges and lawyers
 suggest what might be the advantages of the two systems.
Delivery
The success of a spoken presentation depends greatly on the way in which you
deliver it.
 Do not speak too quickly.
 Check your pronunciation and fluency with phrases.
 Speak clearly and ‘project’ your voice so that everyone present will be able to
hear and understand you.
 Rehearse your presentation until you are comfortable with it.
If you speak to an audience, remember to get feedback on your performance.
2.1.3 Trustees, sellers, buyers, distributors and franchisees

It is worth distinguishing between an agent and a trustee, a seller or buyer, a distributor
and a franchisee.
Trustee Even if it can be said that a trustee exercises powers on behalf of the beneficiaries,
which is doubtful, a trustee does not bring the beneficiaries directly into legal relations
with third parties: it is the trustee who holds the legal interest in the trust property and
who enters into the transactions. The roles of agent and trustee may, however, be mixed:
an agent may hold the property of the principal or the third party on trust, and a trustee
may also be an agent.
Sale The distinction between an agent and a seller is sometimes difficult to establish. In
theory it is straightforward. If A sells to T on behalf of P, A is an agent. But if A buys from P
and resells to T, there are two different sale contracts: (i) P sells to A (ii) A sells to T. Was it
the intention of A and P that A act as agent or as buyer? This must often be determined by
the circumstances: e.g. was the relationship such that A was under an obligation to account
to P for any money received? Was A paid a fee or commission or did A retain the profit
from the sale to T? But none of these may be decisive. The use of the word ‘agent’ by the
parties will not mean that the person is an agent because this is a matter of law: ‘the test is
ultimately one of substance rather than form’ (Rix LJ in Sealy and Hooley, p. 104).
Distributorship and franchise It is commonplace to see a business advertising itself as

‘agent’ for a supplier, but often this does not amount to an agency in the legal meaning
of the word. Someone who has a distributorship or a franchise agreement with a supplier
may have agreed not to sell another supplier’s goods, but this does not in itself create an
agency. Normally, the distributor or franchisee is a principal who sells a particular brand of
product (e.g. Volkswagen cars) or runs a business developed by the franchiser. The consum-
er, who buys goods from either type of business, enters into a contract with the immediate
seller and not with the original supplier or franchiser. Whether someone is an agent or a
principal will depend on the particular circumstances: for example, was it the intention of
the parties that goods supplied would be resold by the recipient acting as principal, or that
the goods would be sold on behalf of the principal.
Activity 2.2† †
Feedback to activities is located
Jane, a shopkeeper, describes herself as ‘sole agent for Bloggs’ Televisions’. Does this mean in a separate section at the end
Bloggs is the principal in any sale by Jane? See WT Lamb & Sons v Goring Brick Co [1932] 1 KB of the subject guide.
710.
Summary Memorising
The key characteristics of an agency are: Generally, we discourage students from trying to
memorise large amount of material. We prefer
 the agent acts on behalf of another (the principal) so
understanding. If you understand the characteristics of
that the principal is bound and can sue or be sued by
agency, you will not need to memorise long definitions.
the third party on the contract made by the agent
You may want to memorise the two items in the sum-
 the agent is not liable on the contract between the mary, but this will work better if you present them as a
principal and the third party. small diagram.
2.2 Types of agent
Essential reading
¢ Sealy and Hooley, Chapter 1: ‘An introduction to commercial law’ pp.5–7 and Chapter 9:
‘Transfer of title’, pp.342–52.
2.2.1 General agent and special agent

A general agent acts for a principal in the ordinary course of that agent’s business; a special
agent has authority only for a particular purpose that is not part of the ordinary course of
business for such an agent. A solicitor would be a general agent if authorised to undertake
a range of legal work for a client, but a special agent if only authorised by the client to sell
a house.
2.2.2 Factor and mercantile agent

A factor is an agent who is entrusted with the possession of goods or documents of title
to goods and who is allowed to sell them in the factor’s own name as a principal (Baring v
Corrie [1818] 2 B & Ald 137) or in the principal’s name (Stevens v Biller [1883] 25 Ch D 31). The
factor has generally been superseded by the mercantile agent.
A mercantile agent is an agent who, in the customary course of business, has authority to
sell or to consign goods for sale, or to buy goods, or to raise money on the security of goods
(Factors Act 1889, s.1(1)). The general rule is that handing over goods or documents of title
to another does not give that person authority to sell, so that anyone buying the goods will
not acquire good title: handing over a car to a mechanic for repair does not constitute an
authority to sell the car. A disposition by a mercantile agent is an important exception to
this general rule.
Where a mercantile agent is in possession of goods or documents of title with the consent
of the owner (even if that consent is later revoked but the goods or documents are not
returned), and the agent, acting in the ordinary course of business as a mercantile agent,
sells or raises money on the security of those goods, that disposition will be valid ‘as if he
were expressly authorised by the owner of the goods to make the same’, as long as the
third party acts in good faith and without notice of a lack of authorisation (Factors Act 1889,
s.1 (1), 2(1), (2); Weiner v Harris [1910] 1 KB 285; Sealy and Hooley, p.343; Official Assignee of
Madras v Mercantile Bank of India Ltd [1935] AC 53; Jerome v Bentley & Co [1952] 2 All ER 114). Of
course, while the Factors Act provides the third party with rights in the goods so disposed,
it does not exempt the mercantile agent from liability to the owner of goods for any breach
of authority.
The status of mercantile agent arises from undertaking one or more dispositions and not by
virtue of pursuing a particular profession or occupation. A mercantile agent must conduct
a business of dealing in goods: a shop assistant sells goods in the course of the business
of another (the shop owner) and, therefore, is not a mercantile agent (Lowther v Harris
[1927] 1 KB 393; Sealy and Hooley, pp.343–5). The Factors Act does not expressly exclude the
possibility of someone acting as a mercantile agent in a one-off sale, although it does refer
to a mercantile agent as someone ‘having in the customary course of his business as such
agent’ authority to dispose of goods, which might suggest past – or the prospect of future
– such business.
2.2.3 Other agents

Broker A broker negotiates contracts between a buyer and a seller without having pos-
session of the goods or the documents of title (Baring v Corrie (1818) 2 B & Ald 137). Produce
brokers are key players in the commodity markets and exchanges. Some act for both buy-
ers and sellers by virtue of the custom of particular markets.
Commission agent A commission agent (or commission merchant) buys or sells goods on
behalf of the owner, but does not establish a contractual relationship between the owner
and the third party. The commission agent acts as principal in the contract with the third
party. Nevertheless, this agent owes to the owner all the duties of an agent to a principal.
In a sale the agent is liable to the third party (the buyer) for breach of the implied terms as
to quality. In a purchase of goods, the agent is liable to the third party (the seller) for the
price, but is not liable to the principal for the quality of the goods. Such agents are familiar
in civil law jurisdictions. But there has only been a limited acceptance of the idea in English
law (Ireland v Livingston (1872) LR 5 HL 395; Robinson v Mollett (1875) LR 7 HL 802) and, in spite
of the attractions of this type of agency, it cannot be regarded as part of English law (but
see Aluminium Industrie Vaassen bv v Romalpa Aluminium Ltd [1976] 1 WLR 676, section 2.1.1
above). The concept of someone who is simultaneously principal and agent does not fit
easily into English agency law because it does not conform to the idea of an agent as one
who is able to alter the legal relations between the principal and a third party. English law
has, instead, opted for the much less satisfactory idea of the undisclosed principal (see
section 3.2).
Confirming houses Confirming houses act for overseas buyers wishing to obtain goods
in English markets. The confirming house can operate in a number of different ways, ac-
cording to the wishes of the buyer. A confirming house may simply buy and sell without
any suggestion of agency, or it may act as an agent for the buyer, or it may act as agent for
the buyer and separately undertake to the seller that the buyer will perform (known as
confirmation) (see Sobell Industries Ltd v Cory Brothers & Co [1955] 2 Lloyd’s Rep 82).
Forwarding agent A forwarding agent undertakes the transmission of goods for the
principal and is personally liable for the freight charges, which are recoverable from the
principal. Such an agent must also exercise reasonable care in relation to the goods.
Del credere agent A del credere agent indemnifies the principal against loss incurred by the
third party’s breach of contract in respect of payment, although not in respect of any other
breach (Gabriel & Sons v Churchill & Sim [1914] 3 KB 1272). An exporter, who is uncertain about
the financial status of a foreign buyer, might find such a guarantee attractive, although the
modern tendency is to obtain a confirmation from a confirming house or to rely either on
a documentary credit, under which a bank pays the seller on the presentation of certain
documents (see Chapter 8), or on credit guarantees, which provide that in the event of the
buyer failing to pay the guarantor will be liable.
Activity 2.3 Practise speaking legal

english Make a short (not
In what ways does an estate agent not fit the legal category of ‘agent’?
more than two-minutes)
spoken presentation in
2.2.4 Commercial agent answer to Activity 2.3.
The meaning of this term is discussed at 3.3.
Activity 2.4
Read Budberg v Jerwood and Ward [1934] 78 Sol Jo 878, 51 TLR 99 (Sealy and Hooley, p.345).
Why was Dr Thadee de Wittchinsky not a mercantile agent and why was this finding
significant?
2.3 Creation of agency
Essential reading
¢ Sealy and Hooley, Chapter 4: ‘Creation of agency and the authority of the agent’
pp.112–13.
There is a distinction between the creation of the agency and the authority that an agent
has to act on behalf of the principal, although the two issues are necessarily tangled
together since the creation of an agency will involve conferment of authority.
An agency may be created:

 by express or implied agreement between the principal and agent
 where there is a representation by the principal to the third party that the agent has
authority (agency by estoppel)
 where the principal ratifies an act by someone who, without authorisation, purported to
undertake that act as an agent of the principal
 where there is an agency of necessity
 where the agency arises under statute, such as, when an unpaid seller exercises the right to
resell under Sale of Goods Act 1979, s 48(3) (RV Ward Ltd v Bignall [1967] 1 QB 534; Chapter 6).
2.4 Consent
Essential reading
pp.112–13.
2.4.1 Consent
Typically, an agency is established by consent of both the principal and the agent (but not
always: see 2.1.2). Normally, it will take the form of a contract, although this is not neces-
sary: acting out of friendship and without payment does not preclude the existence of an
agency (Chaudhry v Prabhakar [1989] 1 WLR 29). The consent may also arise by virtue of the
principal’s ratification after the agent has entered into the transaction (see 2.8).
Where the agency is created by agreement between the principal and the agent no for-
malities are normally required.
The appointment may be made orally or inferred from conduct of the principal show-
ing consent to the agency. The agent’s acceptance can be express or may be inferred,
as where actions on behalf of the principal can only be explained by the existence of an
agency. Where a commercial agent (within the meaning of the Commercial Agents (Council
Directive) Regulations 1993: see 3.3) has been appointed, both agent and principal are
entitled to a signed statement of the terms, but there is no requirement that the contract
of appointment is written (reg. 13(1)).
Since, normally, no formalities are required for the creation of an agency, when determin-
ing whether an agency has come into existence and what authority the agent has, the
court will refer to the intention of the agent and the principal. That intention is discovered
objectively, that is, by considering the appearance created by their words and actions.
The degree of control exercised by one party (the alleged principal) over the other (the
alleged agent) may suggest the existence of an agency. However, with some agents the
principal’s control is limited because the way in which they undertake their activities
is dictated by the rules and custom of their business: for example, much of the work of
stockbrokers is determined by the rules of the exchange within which they operate. So an
alleged principal’s lack of total control does not necessarily indicate that there is no agency
relationship.
For an agency in the full sense of the word to exist the agent must have some degree of au-
tonomy, otherwise the agent performs merely ministerial functions, that is, the agent acts
almost mechanically and without any exercise of discretion. Although someone who acts
on behalf of another in a purely ministerial way is, in a general sense, an agent, the nature
of their obligations and the relationship with the principal is quite different from the sort of
agent with which we are concerned, that is, one with some autonomy and discretion.
That the parties did not intend to create an agency may be suggested by the fact that
the person carrying out the functions is paid through profit earned in trading rather than
through commission, or is entitled to fix the price of the goods being sold, or retains
money received from sales. Yet, such matters are not conclusive since a principal can con-
sent to an agent making a profit or entering into personal contracts with buyers. Even if the
principal is not aware that the agent is making a profit and so cannot have consented, this
alone cannot be determinative of the existence of the agency since that would enable the
agent to define the existence of the agency unilaterally: it would be the same as saying that
no agency exists if the alleged agent breaches what would otherwise constitute his or her
fiduciary duty (the obligation not to make a secret profit or to undertake other business
that conflicts with the interests of the principal).
If the parties do put their agreement into a contractual document, it is likely to be decisive
in forming a court’s view of the parties’ intention (AMB Imballaggi Plastici SRL v Pacflex Ltd
[1999] 2 All ER (Comm) 249; Mercantile International Group plc v Chuan Soon Huat Industrial
Group plc [2002] EWCA Civ 288).
2.4.2 Power of attorney

It is commonplace to appoint an agent by executing a power of attorney under the Power
of Attorney Act 1971, if only because this overcomes practical difficulties the agent might
have in establishing their authority to the satisfaction of third parties. The Enduring Powers
of Attorney Act 1985 permits a power of attorney that will continue in spite of the subse-
quent mental incapacity of the donor, although in that situation the attorney (that is, the
agent) must not act (subject to certain exceptions) until the power of attorney has been
registered by the court. Under the Act the attorney and third parties are entitled to protec-
tions in certain situations where the power of attorney proves to be invalid or is revoked
(s.9, Enduring Powers of Attorney Act 1985).
Summary
Normally, an agency will be established by consent of both parties. The parties can create
the agency by a written agreement (for example, power of attorney), but it is also possible
to imply the existence of the agency from the spoken words or the conduct of the parties.
Activity 2.5
Jake tells Anne that he owns a painting by Picasso, which he wishes to sell. Anne knows that
Pugwash, who is a wealthy collector, has always admired this painting. Pugwash is away
on business and cannot be contacted, but some time ago he expressed to Anne the wish to
own the painting and willingness to pay up to £1 million. Anne tells Jake that she is acting
for Pugwash and can offer £1 million. Jake accepts. Anne writes to Pugwash telling him of
the deal. Pugwash receives the letter, but does not reply. In fact, Pugwash no longer wants
the picture. Is Pugwash liable to pay for the painting?
2.5 Actual authority of the agent
Essential reading
pp.112–18.
In 2.1.1 above, we discussed ‘authority’ when trying to understand and to define the nature
of agency. Here the word ‘authority’ is used in a different sense to mean the ability of the
agent to bind the principal.
We have seen already that the authority that an agent has to bind the principal is entan- Using your notebook or
gled with the creation of the agency. If the principal and agent agree to the creation of the ring binder You may like to
agency that agreement will embody the authority of the agent. In agency by estoppel, the note down the two different
representation of the principal establishes the authority of the agent to bind the principal meanings of ‘authority’.
and defines the scope of that authority (apparent or ostensible authority).
The principal is bound only by those acts of the agent that are within the scope of that
agent’s authority. In Jacobs v Morris [1902] 1 Ch 816, an agent had authority to make, draw,
sign, accept or indorse bills of exchange and sign cheques, but he represented to a third
party, who took him at his word, that he also had authority to borrow. It was held that the
principal was not liable. The rule that the principal will only be bound by those actions
within the agent’s authority raises the question of what is meant by ‘authority’. This will be
discussed in the next sections.
2.5.1 Definition of actual authority

The scope of an agent’s actual authority is important. Generally, it is only if an agent acts
within actual authority that they are able to claim an indemnity from the principal for any
expenses incurred or remuneration under the agency contract with the principal. Also, an
agent who acts outside their actual authority may be liable to the third party for breach of
the implied warranty of authority (see 3.1.6).
The actual authority of an agent is determined by the agreement between the principal
and the agent. It is, therefore, a matter of contract construction and consists of:
 express actual authority: the authority expressly given to the agent by the principal
 implied actual authority: the authority that can be implied into the agreement between
the agent and principal.
(See Diplock LJ in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB
480; Sealy and Hooley, pp.115, 118–21.)
2.5.2 Express actual authority

Express actual authority is the authority which the principal expressly gives to the agent:
for example, where the agent is instructed to sell a particular property for the principal. In
determining the express authority of an agent, the normal rules for construing contracts
apply. (For a recent discussion of express authority: SMC Electronics Ltd v Akhter Computers
Ltd [2001] 1 BCLC 433.)
Activity 2.6
Where the scope of the agent’s actual authority is unclear, what should the agent do?
2.5.3 Implied (or incidental) actual authority

In addition to express actual authority, the agent may have implied actual authority. It is
important to recognise that implied authority cannot contradict express actual authority.
Implied actual authority is a way of filling in the gaps in the agency agreement. It is not a
means of altering that agreement. However, some agents (e.g. those operating in the finan-
cial markets, such as stockbrokers and insurance brokers) are subject to terms imposed by
statute or the rules of a particular market and those terms may override the express terms
of the agreement.
The agent will have implied actual authority to do those things that are necessarily
incidental to the execution of the express actual authority. The question is, do the powers
expressly given by the principal to the agent enable the agent to carry out the specified
task, or can that task not be undertaken without implying the authority to do things in
addition to those that are expressly authorised? Such additional authority will not be easily
implied. Authorising an agent to enter into a contract to buy land carries implied actual au-
thority to sign the documents required under statute because otherwise the agent would
not be able to perform the task agreed (Rosenbaum v Belson [1900] 2 Ch 267). On the other
hand, in Bryant, Powis, and Bryant Ltd v Law Banque du Peuple [1891–94] All ER 1253, an agent,
who had express actual authority by power of attorney to buy or sell goods, charter vessels
and employ agents and servants, did not have implied actual authority to borrow money
because this was not necessary to the tasks expressly authorised.
The agent may have authority to undertake that which is implied from the particular cir-
cumstances of the relationship between this principal and this agent, such as where there
has been a previous course of dealings.
The agent may have the usual authority of someone in this agent’s position, trade, business
or profession. The test is, what authority would the reasonable person in the agent’s posi-
tion believe they possessed? It will be implied that someone appointed as managing direc-
tor of a company has the usual authority that managing directors possess (Hely-Hutchinson
v Brayhead Ltd [1968] 1 QB 549; Sealy and Hooley, pp.115–17). However, an estate agent will
not have authority to sell property since this is not what such agents usually have authority
to do, but they will have authority to make representations because this is what estate
agents usually have authority to do.
The agent will have such authority as is customarily enjoyed by someone dealing in the
particular market. To imply a custom, it must be uniform, certain, notorious (that is, gener-
ally known), recognised as binding and reasonable (Robinson v Mollett [1875] LR 7 HL 802). A
broker employed to transact business in a market is authorized to deal according to the us-
age of that market (Nickalls v Merry [1875] LR 7 HL 530). However, customary authority will
not be recognised where it contradicts either the express agreement between the agent
and the principal or the normal duties owed by the agent to the principal. In one case, even
though it was a custom of the London tallow market that brokers, who were employed
to buy goods, could sell their own goods to the principal, the court held that this was not
part of the agent’s customary authority because evidence ‘cannot be admitted to convert a
broker employed to buy for his employer, into a principal to sell to him’ (Robinson v Mollett
[1875] LR 7 HL 802, Mellor J).
Summary
The actual authority of an agent is determined by the express agreement between the
parties (express actual authority) and any appropriate implications from the surrounding
circumstances (implied actual authority) that do not contradict the express actual author-
ity, unless imposed by statute.
2.6 Agency by estoppel and apparent authority
2.6.1 Definitions
As Diplock LJ pointed out, ‘In ordinary business dealings the contractor at the time of enter-
ing into the contract can in the nature of things hardly ever rely on the “actual” authority of
the agent.’ (Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480; Sealy
and Hooley, pp.118–21.) This is simply because the third party will not have access to the
terms on which the agent has been appointed. The third party, therefore, relies on a per-
ception as to the authority of the agent, that is, the agent’s apparent authority. Apparent
(or ostensible) authority is ‘the authority of an agent as it appears to others.’ (Lord Denning
MR in Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549, Sealy and Hooley, pp.115–17.)
Apparent authority arises where: Reading cases For advice

 the principal (or someone acting with the actual authority of the principal) represents to on reading cases and making
the third party that the agent is authorised to undertake the transaction which the agent notes on them, see your
and the third party subsequently conclude Learning skills for law guide.
 the agent did not purport to make the agreement as principal

 the third party was induced to enter into the transaction in reliance upon that
representation
 the third party altered their position to their detriment.
It is unclear whether this last is an additional requirement (Rama Corpn Ltd v Proved Tin
and General Investment Ltd [1951] 2 QB 147, Sealy and Hooley, p.118), or whether it merely
reiterates the requirement that the third party enter the transaction in reliance upon the
representation (The Tatra [1990] 2 Lloyd’s Rep 51 at 59, Sealy and Hooley, p.127. But see Spiro
v Lintern [1973] 1 WLR 1002, discussed below).
Where there has been such a representation, the principal will be prevented from denying
the existence of the agency (agency by estoppel) and will be bound in so far as the agent’s
act came within the authority that the agent was represented by the principal as possess-
ing (the agent’s apparent authority). The result is that the principal may be bound to a
third party even though:
 the agent does not have actual authority, or
 the agency agreement has ceased, or
 the agent acts beyond the actual authority granted by the principal.
In other words, the agency here is based on estoppel and not the consent of the principal
(Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480; Sealy and
Hooley, pp.118–21). Nevertheless, the third party can enforce the contract against the princi-
pal even though the agent did not have actual authority.
Where someone has been represented by the principal as having authority to act as agent,
that person will possesses the usual authority of such agents in spite of any restrictions
imposed by the principal on the agent (Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549, Lord
Denning MR; Sealy and Hooley, pp.115–17). In Freeman & Lockyer v Buckhurst Park Properties
(Mangal) Ltd [1964] 2 QB 480 (Sealy and Hooley, pp.118–21), K and H formed a company to
buy and then sell some land. K, H and a nominee of each were appointed directors. The
articles of association contained a power to appoint a managing director but none was ap-
pointed. K instructed F, a firm of architects, to do work in connection with the land, which
they did. On an action by F for their fees, it was held that since K was not the managing di-
rector he had no actual authority to employ F, but he did have apparent authority because,
with the knowledge of the board of directors, he had acted throughout the transaction as
if he were managing director and his action in engaging the plaintiffs was within the usual
authority of a managing director.
2.6.2 Representation by the principal

In order to be bound by the apparent authority of the agent, the principal must have
represented to the third party that the agent had the necessary authority to conclude the
transaction on behalf of the principal and the third party must have a reasonable belief that
the agent had such authority. In general, if the representation as to authority comes from
the person purporting to be an agent, the principal will not be bound to the third party,
although the bogus agent may be liable to the third party for breach of the warranty of
authority (see 3.1.6).
The representation may be by words or by actions, including a course of dealings. Usually,

silence or inaction will not amount to a representation, unless there is a duty to say some-
thing, which will be rare. In Spiro v Lintern [1973] 1 WLR 1002, L said nothing after his wife
entered into a contract for the sale of his house. The buyers later incurred various expenses
in contemplation of completion. L was estopped by his silence from denying the authority
of his wife to sell.
This unusual case illustrates another point. To establish apparent authority the third party
must have relied on the representation of the principal. Normally, this will be evidenced
by the third party entering the contract. This was not the case in Spiro v Lintern where the
representation and reliance occurred after the contract. In this situation it would seem that
the third party would be required to have acted to their detriment.
2.6.3 Representation by the agent

Another difficulty is that, because a company must act through agents, representations
as to the authority of those agents must come from one of the company’s agents. If the
representation comes from the same agent as later makes the transaction, then, generally,
the principal is not bound. But there is nothing to prevent the principal from endowing
that agent with authority (actual or apparent) to make representations about the agent’s
own authority to act in the transaction for the principal (Freeman & Lockyer v Buckhurst Park
Properties (Mangal) Ltd [1964] 2 QB 480; Sealy and Hooley, pp.118–21; Egyptian International
Foreign Trade Co v Soplex Wholesale Supplies Ltd and PS Refson & Co Ltd [1985] 2 Lloyd’s Rep 36;
Sealy and Hooley, pp.123–24).
This issue arose in First Energy Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194.
FE wished to arrange credit facilities through the bank and dealt with J, who was senior
manager of the bank’s Manchester branch. FE knew that J was not authorised to grant
the credit facilities and that these could only be agreed to by head office. Incorrectly and
without authority, J wrote to FE saying that head office had approved the credit facility. The
Court of Appeal decided that as a manager J had apparent authority to write to FE informing
them of the decision made by head office, and, therefore, the bank was bound by J’s letter
indicating that head office had agreed to give the facilities.
This case distinguished Armagas Ltd v Mundogas SA [1986] AC 717, where the House of Lords
dismissed the argument that P had represented to T that A was authorised to make a
representation on behalf of P to the effect that A had actual authority to undertake the
transaction with T.
The third party cannot claim that the agent has apparent authority where the third party
knows, or ought to know, that the agent does not possess actual authority. In such a situ-
ation the third party has not relied on the representation by the principal. In Overbrooke
Estates Ltd v Glencombe Properties Ltd [1974] 1 WLR 1335, a term in an auction sale catalogue
said the auctioneer did not have the seller’s authority to make representations about
the property being sold. Shortly before the sale the auctioneer told a prospective buyer
that the local authority had no plans with respect to the property. The buyer bought the
property, and then discovered it was in an area that might be included in a slum clearance
programme. It was held that, even if the auctioneer had apparent authority to make such
representations (and the auctioneer might only have apparent authority to accept bids),
the buyer knew (or ought to have known) of the term and was, therefore, bound by it. The
Misrepresentation Act 1967, s.3, which limits the ability of parties to exclude or restrict
liability for misrepresentation, does not seem to restrict this ability of the principal to
exclude or limit the apparent authority of the agent to make representations as to the
subject-matter of the contract.
Summary
Where the principal (or an agent with actual authority) represents to the third party that
the agent is authorised to undertake the transaction, and the third party is induced to
enter into the transaction in reliance upon that representation, the principal will be bound.
The principal will not be bound where the representation on which the third party relied
came from the agent undertaking the transaction, unless it was reasonable in the circum-
stances for the third party to believe that this agent had authority to make representations
about their own authority on behalf of the principal.
Activity 2.7
How can the decisions in First Energy Ltd v Hungarian International Bank Ltd and Armagas Ltd
v Mundogas SA be distinguished?
2.7 Usual authority: Watteau v Fenwick
Essential reading
pp.128–32.
The troublesome decision in Watteau v Fenwick [1893] 1 QB 346 must be discussed because
of the debate it has provoked and because it does not fit in with other cases on the scope of
the agent’s authority. F owned a hotel appointing H as manager, but H was expressly forbid-
den from buying any goods other than mineral water and bottles of beer. H had previously
owned the hotel and his name remained above the door as the licensee. H ordered cigars
from W, who believed he was the owner of the hotel. F was held liable for the price of the
cigars. (One might wonder whether F could have sued W if W had failed to deliver the cigars
or had delivered cigars that were defective.)
It might be argued that W did not think H was an agent; he believed H to be the principal,
so if W had not been allowed to enforce the contract against F, W would have lost nothing
because he was unaware of F’s existence. Against this it might be said that F’s action in
allowing his agent, H, to represent himself as the principal placed W in a weakened posi-
tion. W had every reason to suppose that H was the principal and this misconception was
facilitated by F.
The case does not fall within the normal understanding of the doctrine of apparent author-
ity because F made no representation to W that H was acting as F’s agent. Also, the decision
does not fit in with those cases where someone is appointed to a particular position and
the principal is bound by actions that fall within the usual authority of an agent in that posi-
tion (Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549; Sealy and Hooley, pp.115–17).
As will be seen, the doctrine of undisclosed principal will not assist because for that to
operate the agent must enter the transaction with the actual authority of the principal (see
3.2). Similarly, the principal cannot ratify the transaction because this would have required
H to have told W that he was an agent and this he did not do (see 2.8).
It has been suggested that this case is an example of estoppel by conduct, not estoppel by
agency. F had put H into a position that made it appear, not that H was an agent, but that
the owners of the hotel and H were not distinct parties. H might be seen as a principal with
respect to W and an agent with respect to F, and F was estopped from defending an action
by W because of the conduct. This would mean that the case is not concerned with agency
at all.
The case has been expressly overruled by one Canadian court (Sign-O-Lite Plastics Ltd v
Metropolitan Life Insurance Co [1990] 73DLR (4th) 541). In the English courts it has been
regarded as ‘puzzling’ (Rhodian River Shipping Co SA v Halla Maritime Corp [1984] 1 Lloyd’s
Rep 373, Bingham J), but not overruled. Yet, it is difficult to find cases in which it has been
applied and in similar circumstances the courts have tended to hold the contract to be
between the ‘agent’ personally and the third party (Kinahan & Co v Parry [1911] 1 KB 459).
Summary
The decision in Watteau v Fenwick [1893] 1 QB 346 is difficult to explain or defend. It does Go to your study pack
not fit into any of the well-defined categories of agency and the general disinclination of and read ‘Agents, business
the English courts to apply the decision or even to refer to it might suggest that it is to be owners and estoppel’ by
treated either as an anomaly or as wrong. Andrew Tettenborn.
Activity 2.8 The need for a critical approach

Is the decision in Watteau v Fenwick wrong? Activity 2.8 asks whether you think the court’s decisions was
wrong. In English law, judges’ decisions are always open to critical
assessment. To become an LLB graduate, you need to demonstrate
critical qualities.
Criticism is not about pointing out minor errors in a person’s
position – such as spelling mistake and inserting the wrong year
for a case. It is about demonstrating a unique personal position
on something. It is also about demonstrating your ability to use
your knowledge and understanding of law to make meaningfully
comments. As Anne Thompson says in her book Critical reasoning: a
practical introduction (London: Routledge, 1996, ISBN 0415132045):
‘Critical reasoning is centrally concerned with giving reasons for
one’s beliefs and actions, analysing and evaluating one’s own
and other people’s reasoning, devising and constructing better
reasoning. Common to these activities are certain distinct skills,
for example, recognising reasons and conclusions, recognising
unstated assumptions, drawing conclusions, appraising evi-
dence and evaluating statements, judging whether conclusions
are warranted; and underlying all of these skills is the ability to
use language with clarity and discrimination.’
Your ability to deploy critical reasoning is vitally important for
your learning Portfolio. Make sure you note what you have done
– and your reflections on what you have done – in your Portfolio or
learning journal,
See also the section in the critical approach in your Learning skills
for law guide.
2.8 Ratification
Essential reading
pp.138–46.
2.8.1 Requirements for ratification

The principal may be bound where they ratify a transaction entered into by someone who
purported to act as their agent. This is not apparent authority because the agent cannot
represent their own authority. If the third party decides to go ahead with the transaction,
they take a risk that the purported agent has authority or that the principal will ratify the
transaction, because unless there is actual authority or ratification the principal will not be
liable on the contract made by the purported agent.
There are various reasons why a principal might ratify such a transaction: the principal may
be happy with the deal, or may be unhappy with the transaction but decide to ratify it to
maintain commercial reputation or to preserve the reputation of the agent. However, in
determining if there has been ratification, the motive of the principal is irrelevant.
There are a number of requirements for valid ratification.
At the time of the relevant act, the agent must have intended to act on behalf of the princi-
pal. Such intention is gathered from the terms of any contract and surrounding circum-
stances (National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582).
The purported agency must be revealed to the third party at the time of the transaction.
There can be no ratification where A makes the contract as principal (Keighley, Maxsted & Co
v Durant [1901] AC 240; Sealy and Hooley, pp.139–40). The identity of the principal need not
be disclosed, ‘but there must be such a description of him as shall amount to a reasonable
designation of the person intended to be bound by the contract.’ (Watson v Swann [1862] 11
CBNS 756, Willes J; Sealy and Hooley, p.141). It will be sufficient if the agent stated that they
were acting for a class of persons to which the principal belonged (National Oilwell (UK)
Ltd v Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582. Contrast that decision with Southern Water
Authority v Carey [1985] 2 All ER 1077). The justification for this requirement of identification
is, according to Lord Macnaghten in Keighley, Maxsted & Co v Durant [1901] AC 240 (Sealy
and Hooley, pp.139–40), that ‘civil obligations are not to be created by, or founded upon,
undisclosed intentions’ (but see section 3.2).
The third party must believe that the person with whom they are dealing has authority
to act for another. Where the agent states that the ‘contract’ is subject to ratification, this
does not fall within the doctrine of ratification because it amounts to saying there will be
no contract until the principal has given approval.
The principal must be competent to enter the contract at the time it was made. For
instance, did the company have authority under its constitution to do this act?
The principal must be competent at the time of ratification: for example, if P is an enemy
alien they cannot ratify, even if at the time of the contract P was not an enemy alien. Since
ratification relates back to the moment of the original act (see 2.8.2), there is an argument
for looking solely at whether the principal was competent at that time, but, of course, a
principal who lacks competence (such as a company that has been wound up or a person
who has lost mental capacity) would not be able to signify ratification.
Ratification must occur within a reasonable time after the action of the purported agent
(The Managers of the Metropolitan Asylums Board v Kingham [1890] 6 TLR 217). What consti-
tutes a reasonable time will depend on the circumstances, but ratification may still occur
even after the contract has commenced: e.g. an insurance policy may be ratified even after
loss has occurred (Williams v North China Insurance Co [1876] 1 CPD 757). Ratification may be
implied from the failure to act within a reasonable period of time, although it is likely to be
difficult to show that inaction indicated a clear intention to ratify.
No formalities need be observed for a valid ratification. The principal will only be held to
have ratified if they did so with full knowledge of the facts, although there will be ratifica-
tion if it is clear that the principal is willing to adopt the act whatever the circumstances
(Marsh v Joseph [1897] 1 Ch 213). Ratification can be express or implied from conduct as
long as the intention to ratify is clear and unequivocal: e.g. where the principal sues the
third party on the contract. An authorised agent can ratify (Suncorp Insurance and Finance
v Milano Assicurazioni SpA [1993] 2 Lloyd’s Rep 225) and there seems no reason why a pur-
ported ratification by an agent, who had no authority to ratify, cannot itself be ratified.
Activity 2.9
Why was the attempt to ratify ineffective in Boston Deep Sea Fishing and Ice Co Ltd v Farnham
(Inspector of Taxes) [1957] 1 WLR 1051?
2.8.2 Effect of ratification

Ratification puts the parties into the position they would have been in had the act been
authorised from the outset: ‘ratification when it exists is equivalent to a previous authority’
(Lord Lindley in Keighley, Maxsted & Co v Durant [1901] AC 240; Sealy and Hooley, pp.139–40).
The principal can sue or be sued by the third party.
The agent will not be liable to the principal for excess of authority nor to the third party for
breach of warranty of authority.
The agent may be entitled to be indemnified by the principal for any liability incurred. In
Suncorp Insurance and Finance v Milano Assicurazioni SpA [1993] 2 Lloyd’s Rep 225, Waller J
suggested that, while ratification normally relieves the agent from personal liability to the
principal, the principal might be able to ratify without waiver of the breach of duty by the
agent.
Since ratification puts the parties into the same position as if the act had been authorised
from the outset, then logically it relates back to the moment of the original contract. The
unusual consequence of this was illustrated by Bolton Partners v Lambert (1889) 41 Ch D
295 (Sealy and Hooley, pp.142–4). S accepted an offer from L on behalf of B but without B’s
authority. L later withdrew the offer and only then did B ratify. It was held that the contract
was binding on L. No real reasoning was provided for this other than that ratification meant
‘the agent is put in the same position as if he had had authority to do the act at the time the
act was done by him.’ (Cotton LJ). This rule allows the principal to choose whether or not
to ratify, but such a choice is not available to the third party. On the other hand, the third
party believed themselves to be bound by the contract and, if the principal fails to ratify, an
action for breach of warranty of authority will lie against the agent.
There are limits to the rule in Bolton Partners v Lambert. In addition, to the requirements
already discussed (2.8.1), ratification is not likely to be effective:
 if the interests of someone other than a party to the original contract are unfairly affected,
or if the unauthorised act was void as a nullity. In Brown v Bird [1850] 19 LJ Ex 154, without
authority the seller’s agent stopped goods in transit (see 6.2.5). Before the seller ratified
this action the goods had reached the trustee in bankruptcy of the buyer. The ratification
was held to be ineffective. On the other hand, in Presentaciones Musicales SA v Secunda [1994]
Ch 271), without authority solicitors issued a writ; this action was later ratified, but that
ratification came outside the statutory time limits for issuing the writ. It was held that the
ratification was effective. The majority in the Court of Appeal did not regard the solici-
tors’ action as a nullity and contrasted this with the situation in Brown. Roch LJ, however,
thought that the cases showed ratification could not occur where a third party would be
deprived of their property rights (see also, Brook v Hook [1871] LR 6 Exch 89; Owners of the
ship ‘Borvigilant’ v Owners of the ship ‘Romina G’ [2003] EWCA Civ 935; Sealy and Hooley,
pp.145–6), or
 if the agent and the third party rescind the agreement before ratification (Walter v James
[1871] LR 6 Exch 124).
An attempt to ratify only part of a contract and repudiate the rest will operate as ratifica-
tion of the whole (Suncorp Insurance and Finance v Milano Assicurazioni SpA [1993] 2 Lloyd’s
Rep 225. But see, Marsh v Joseph [1897] 1 Ch 213).
Summary Go to your study pack and

read ‘The principle in Bird
Where someone purports to act as agent but does so without authority, the person on
v Brown revisited’ by Tan
whose behalf they purport to act is not bound. The unauthorised act may, however, be
Cheng-Han.
subsequently ratified by the principal. In general, ratification puts the principal, agent and
third party in the same position as if the act had been undertaken with authority.
Activity 2.10
J forges H’s signature on a promissory note. The forgery is discovered. H wants to protect J
from prosecution, can H ratify the promissory note?
Read Brook v Hook (1871) LR 6 Exch 89. (A promissory note is an unconditional promise to
pay made by one person to another and signed by the maker: Sealy and Hooley, pp.770–73.)
2.9 Agency of necessity
Essential reading
pp.138–46.
In a restricted range of emergencies, an agency may arise as a matter of law so the agent
is authorised to bind the principal to the extent required by that emergency without prior
authority from, or ratification by, the principal. Agency of necessity can bind a principal to
a third party, or allow an agent to claim reimbursement for expenses incurred, or provide a
defence to a claim (e.g. in the tort of conversion). The courts are reluctant to find an agency
of necessity exists because it imposes obligations on someone who has not given consent
(China-Pacific Sa v Food Corporation of India, ‘The Winson’ [1982] AC 939; Sealy and Hooley,
pp.133–6. But see also The Choko Star [1990] 1 Lloyd’s Rep 516; Reynolds [1992] JBL 505). This
means that there are very few situations in which an agency of necessity will arise.
The agency of necessity may arise where certain conditions are fulfilled:
 P’s property must be in A’s possession as the result of an existing legal relationship, such as
a contract of bailment. This excludes claims by strangers, such as someone who finds the
goods
 A is unable to obtain instructions from the owner
 an emergency threatens the property; it is not sufficient for A to show that P’s property is
causing A hardship or inconvenience (Sachs v Miklos [1948] 2 KB 23)
 A takes action in good faith and that action is commercially reasonable, proportionate and
in the interests of P (Prager v Blatspiel, Stamp and Heacock Ltd [1924] 1 KB 566).
Since it is a characteristic of an agent that they can affect the legal relations of the principal,
it might be argued that those ‘agents’ who only have the right to claim expenses or to
defend an action are not true agents of necessity and that the only true agency of necessity
is the master of a ship who acts to save the ship or its cargo in an emergency. It has been
said that this agency of necessity derives from the peculiar position of the master of a ship
and ‘affords no analogy to the case of an ordinary agent’ (Hawtayne v Bourne [1841] 7 M & W
595 at 599, Parke B).
Certainly, the area is confused because many situations, which are treated as agency
of necessity, seem to be examples of the implied actual authority of the agent, or of an
implied term of a contract, or of the application of the law of restitution (Sealy and Hooley,
pp.136–38). For example, the requirement that P’s property is in A’s possession as the result
of an existing legal relationship may mean that the obligation to reimburse expenses
arises from an implied term in that contract rather than from the agency of necessity. In
The Great Northern Railway Company v Swaffield (1874) LR 9 Exch 132, a carrier conveyed a
horse to its destination and, when the owner failed to collect it, incurred expenses for feed,
stabling, etc. The carrier successfully defended an action for conversion and recovered the
expenses incurred. Some of the judges did talk of this as a case of expenses being necessar-
ily incurred, but the test they applied was the same as would be used to imply a term. The
obligation to pay the expenses is better explained as a term of the contract of carriage or
of the contract of bailment, both of which contracts require the carrier to take reasonable
care of the horse.
Useful further reading

¢ Brown, I. ‘Authority and necessity in the law of agency’ (1992) 55 MLR 414.
Activity 2.11
M owned a house and rented out rooms. In 1940 she agreed to store in her house furniture
belonging to her friend, S. M did not charge S and agreed to keep it until such time as S
wished to collect it. M and S stayed in contact for another year, but after that M heard
nothing from S, who appeared to have moved. In 1943 the house suffered damage, and, as a
result, the room in which the furniture was stored was required for letting. M tried to trace
S, but without success. In 1944, M sold the furniture. Two years later S sued M in the tort of
conversion. Could M argue that the circumstances gave rise to an agency of necessity?
2.10 Capacity
2.10.1 Capacity of the principal

The general rule is that whatever a principal is competent to do personally may be delegat-
ed to an agent. The other side of this rule is that a principal cannot authorise an agent to do
an act which the principal is not competent to undertake: e.g. an alien enemy (the national
of a country with which this country is at war) cannot authorise an agent to undertake an
act (Boston Deep Sea Fishing and Ice Co Ltd v Farnham (Inspector of Taxes) [1957] 1 WLR 1051).
Where the principal’s ability to enter into a contract is qualified by age, the agent’s capacity
is also qualified. The principal on acquiring the necessary capacity can avoid a contract
made by the agent. The agent’s capacity is terminated by the death of the principal or,
where the principal is a company, the liquidation or winding-up of the company.
2.10.2 Capacity of the agent

Since the agent is acting for the principal, the capacity of the agent to enter the particular
transaction on the agent’s own behalf is, generally, irrelevant: e.g. a minor (someone below
the age of legal capacity), who is a partner of a firm, can bind the partnership even if, had
the minor entered into the contract on his or her own behalf, it would not have been bind-
ing. Similarly, the fact that the agent would have the capacity to undertake a transaction on
their own behalf will not supply the deficiency of the principal: an enemy alien wishing to
sell goods in England does not remedy their own contractual incapacity by employing an
English agent. Finally, it is important to note that some agents, such as solicitors and insur-
ance brokers, are required by statute to have particular qualifications before they can act
for a principal in respect of certain transactions.
Summary
Anyone can appoint an agent, but the agent’s competence to engage in transactions is
restricted by the competence of the principal. The reverse is, generally, not true: an agent
can undertake transactions on behalf of the principal that would be outside the agent’s
personal capacity.

 define the term ‘agent’
 explain how an agency is created
 explain and discuss the scope of the agent’s authority.
Sample examination question

‘Actual authority and apparent authority are quite independent of one another. Generally
they co-exist and coincide, but either may exist without the other and their respective
scopes may be different.’ Discuss.
Advice on answering the question

This quote is taken from the judgment of Diplock LJ in Freeman & Lockyer v Buckhurst Park
Properties (Mangal) Ltd [1964] 2 QB 480 (Sealy and Hooley, pp.118–21). A good answer would
outline what is meant by actual authority and apparent authority, and then highlight
the distinction between them. Actual authority is based on the consensual agreement
between the principal and the agent, while apparent authority is about the agent’s ability
to bind the principal to third parties, even though the agent lacks actual authority, and is
concerned with the appearance of authority. While it is common for the apparent author-
ity of an agent to coincide with their actual authority, the third party’s knowledge of the
agent’s authority will almost always depend upon a representation by the principal. The
relationship between the agent and principal will be governed by actual authority (see
Sealy and Hooley, p.114) and be governed by apparent authority, which may or may not
coincide with actual authority.
Reflect and review

Look through the points listed below. Are you ready to move on to the next Reflection
chapter? We live in an age of reflection
Ready to move on = I am satisfied that I have sufficient understanding of the which simply means thinking
principles outlined in this chapter to enable me to go on to the next chapter. about, or contemplating, what
we are doing in order to help
Need to revise first = There are one or two areas I am unsure about and need to ourselves do it better.
revise before I go on to the next chapter.
For more guidance on this, see
Need to study again = I found many or all of the principles outlined in this the section on reflection in your
chapter very difficult and need to go over them again before I move on. Learning skills for Law guide.
Tick a box for each topic.

Ready to Need to Need to
move on revise first study again
I can define the term ‘agent’. ¢ ¢ ¢
I can explain how an agency is created. ¢ ¢ ¢
I can discuss and explain the scope of the agent’s

authority. ¢ ¢ ¢
If you ticked ‘need to revise first’, which sections of the chapter are you going to revise?
Must Revision
revise done
2.1 What is an agency? ¢ ¢
2.2 Types of agent ¢ ¢
2.3 Creation of agency ¢ ¢
2.4 Consent ¢ ¢
2.5 Actual authority of the agent ¢ ¢
2.6 Agency by estoppel and apparent authority ¢ ¢
2.7 Usual authority: Watteau v Fenwick ¢ ¢
2.8 Ratification ¢ ¢
2.9 Agency of necessity ¢ ¢
2.10 Capacity ¢ ¢
3 Agency 2
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
3.1 Relationship with third party: disclosed principal . . . . . . . . . . . . . 41
3.2 Relationship with third party: undisclosed principal . . . . . . . . . . . 45
3.3 Relationship between principal and agent . . . . . . . . . . . . . . . . 49

Introduction
In this chapter the rights and liabilities of the principal, agent and third party on a contract
made by the agent are discussed in two situations:
 where the existence of the agency is disclosed to the third party (disclosed principal/
agent: 3.1)
 where the existence of the agency is not disclosed to the third party (undisclosed principal/
agent: 3.2).
The final section discusses the relationship between the principal and agent.
Learning outcomes
By the end of this chapter and the relevant readings you should be able to:
 explain the rights and obligations owed by the principal and by the agent to the third
party
 explain the rights and obligations owed by the third party to the principal and to the
agent
 explain the rights and obligations arising between the principal and the agent.
3.1 Relationship with third party: disclosed principal
Essential reading
¢ Sealy and Hooley, Chapter 5: ‘Relations with third parties’, pp.147–57.
3.1.1 Principal-third party

The disclosed principal (or disclosed agency) is where the existence of the principal
is disclosed. The disclosed principal may be named (that is, identified) or unnamed
(unidentified).
As has been seen, the general rule is:

where a person contracts as agent for a principal the contract is the contract of the princi-
pal, and not that of the agent; and, prima facie, at common law the only person who may
sue is the principal, and the only person who can be sued is the principal. (Montgomerie
v United Kingdom Mutual Steamship Association [1891] 1 QB 370, Wright J; Sealy and Hooley,
pp.147–48).
Lord Scarman preferred a rather different emphasis. His view was that everyone is liable
for their contracts, even where they act for another, unless they can show that this liability
is removed by the law of agency (Yeung Kai Yung v Hong Kong and Shanghai Banking Corpn
[1981] AC 787 at 795; Hooley and Sealy, p.158).
The principal may sue or be sued on the contract with the third party if the agent discloses
the agency and:
 acts within actual authority
 acts without actual authority and the principal ratifies.
It should be pointed out that the principal may be sued on the contract if the agent acts
within apparent authority, but cannot sue the third party without ratification.
In response to a claim by the disclosed principal, the third party can use:
 any defence or claim arising from the contract
 any defence or claim available against the principal.
A defence or claim available against the agent and unconnected with the contract cannot
be used against the principal.
3.1.2 Principal-third party: payment

In general, payment by the third party to the agent does not constitute payment to the
principal. A third party can only discharge a debt owed to the principal by paying the agent
in a limited number of circumstances (Irvine & Co v Watson & Sons [1880] 5 QBD 414. See
Sealy and Hooley, pp.150–53):
 if an express or implied term of the contract specifies this method of payment
 if the principal is estopped from denying the right of the third party to pay the agent
because such payment was induced by a representation by the principal
 if the agent has actual authority from the principal to receive payment
 if this method of payment was ratified by the principal: for example, the third party will be
discharged if payment is made to the agent, who had no authority to receive payment, and
the agent passes that payment to the principal, who accepts it.
These situations may be reversed. For example, in Wyatt v Marquis of Hertford [1802] 3 East
147, the third party gave the agent a receipt for payment and the principal, therefore, paid
the agent. In fact, the agent had made no payment, but it was held that the principal was
not liable to the third party.
3.1.3 Principal-third party: misrepresentation by the agent

The principal is liable to the third party for a misrepresentation if:
 it was made by an agent acting within their actual or apparent authority or the principal
ratified, and
 the misrepresentation induced the third party to enter into the contract.
This is also the case where the misrepresentation by the agent is fraudulent or negligent
and even if the principal was unaware of the agent’s actions, or the agent was acting for
personal benefit and not for the benefit of the principal (Lloyd v Grace, Smith & Co [1912] AC
716). There is no fraudulent misrepresentation where the agent honestly believes the truth
of the statement that turns out to be false and the principal, while knowing the truth, does
not know that the agent is going to make the statement (Armstrong v Strain [1952] 1 KB 232).
An agent does not come within the terms of the Misrepresentation Act, which was
designed to deal with the liability of the contracting parties for pre-contractual representa-
tions. An agent is, therefore, not liable to the third party for the misrepresentation (Resolute
Maritime Inc v Nippon Kaiji Kyokai (The ‘Skopas’) [1983] 1 WLR 857).
The agent may be liable for negligent misstatement under Hedley Byrne & Co Ltd v Heller
& Partners Ltd [1964] AC 465), which you studied in tort law, and the principal may also be
liable if the agent acted within actual or apparent authority.
Activity 3.1
A is commissioned to find a buyer for a house owned by P. T expresses interest in buying.
A falsely tells T that another person is also interested in the property and that if T pays in
excess of the asking price he would secure it. A also falsely tells T that a tenant is willing
to rent part of the property. Relying on these statements, T enters into a contract to buy.
Advise T, who has now discovered the truth.
3.1.4 Agent-third party: liability to the third party on the contract

The general rule is that where the agency is disclosed, the principal alone is liable on the
contract. However, the agent may make himself or herself personally liable in addition to
the principal. The onus of proof is on the party alleging that the agent is personally liable
(Vlassopulos (N & T) Ltd v Ney Shipping Ltd: The Santa Carina [1977] 1 Lloyd’s Rep 478).
Where A contracts with B on behalf of a disclosed principal C, the question whether both
A and C are liable on the contract or only C depends on the intention of the parties. That
intention is to be gathered from (1) the nature of the contract, (2) its terms and (3) the
surrounding circumstances... The intention for which the Court looks is not the subjec-
tive intention of A or of B. Their subjective intentions may differ. The intention for which
the Court looks is an objective intention of both parties, based on what two reasonable
businessmen making a contract of that nature, in those terms and in those surrounding
circumstances, must be taken to have intended. (Bridges & Salmon Ltd v The ‘Swan’ (Owner)
[1968] 1 Lloyd’s Rep 5, Brandon J; Sealy and Hooley, pp.162–63).
Where someone signs a contract in their own name and without any qualification, the
general rule is that they will assume personal liability, unless the contrary can be gathered
from the rest of the document and the surrounding circumstances.
In Universal Steam Navigation Co Ltd v James McKelvie & Co [1923] AC 492 (Sealy and Hooley,
p.160–61), the contract was signed ‘as agents’. This showed that they did not sign as princi-
pal and, therefore, did not incur personal liability. Signing ‘for’ another has the same effect.
On the other hand, in The ‘Swan’, Brandon J thought that merely adding the word ‘agent’ or
‘director’ would not, normally, relieve the signer of liability (but see Viscount Cave LC and
Lord Sumner in Universal Steam Navigation, Sealy and Hooley, p.160). Care must be taken in
applying these decisions because words used in one contract may have a different meaning
in another contract.
A term rendering the agent personally liable may be implied by the custom of the agent’s
trade. In Fleet v Murton [1871] LR 7 QB 126, it was held that there was a custom in the
London fruit trade that the agent was personally liable if the name of the principal was not
disclosed.
Before company incorporation

A company cannot be bound by contracts entered on its behalf before incorporation
for the simple reason that at that stage it does not exist and it cannot, therefore, make
contracts. For the same reasons the unincorporated company cannot appoint an agent
to act on its behalf. In Kelner v Baxter [1866] LR 2 CP 174, the promoters of a hotel company
contracted for the purchase of wine before the company was incorporated. Upon incor-
poration the company ratified this action and the wine was drunk. Before payment the
company went into liquidation. The promoters were held personally liable. The company
did not exist and so could not contract.
Under s.36C(1), Companies Act 1985 (inserted by s.130, Companies Act 1989) someone who
purports to make a contract on behalf of a company that has not been formed will be
personally liable. The knowledge of the third party and the intention of the agent are irrel-
evant. All that is required for liability is that the agent purported to sign for the company.
The section is ‘subject to any agreement to the contrary’, which has been construed as
operating only if the agent’s personal liability has been expressly excluded in the contract
(Phonogram Ltd v Lane [1982] QB 938).
Making those who act on behalf of an unincorporated company personally liable may cause
difficulties for promoters who legitimately wish to enter into contracts – for example, to
lease premises – so that trading can begin immediately upon incorporation. The most obvi-
ous solution is novation where, with the consent of the third party, the contract with the
promoter is substituted by a contract with the company (Re Patent Ivory Manufacturing Co,
Howard v Patent Ivory Manufacturing Co [1888] 38 LR Ch Div 156).
Activity 3.2
a Why could the company not ratify the contract after incorporation in Kelner v Baxter?
b Will Jake be liable in either of the following situations?
i He signs contract as follows: ii He signs another contract as follows:
3.1.5 Agent-third party: merger and election

If the agent is personally liable, the third party must choose to sue either the principal or
the agent and having chosen cannot change their mind. If T sues A, but A cannot pay, T
cannot turn to P. The operation of this rule seems harsh and probably does not reflect the
expectations of the parties. The reason the parties wished to hold both principal and agent
liable must have been to give the third party alternative actions.
This process of choosing by the third party is called merger or election. Although Scrutton
LJ saw no distinction between them (Debenham’s Ltd v Perkins [1925] 133 LT 252; Sealy and
Hooley, pp.154–56), there are differences and merger may occur in circumstances where
there can be no election.
 Election involves a choice: the third party is aware of the agency and chooses to sue one
party rather than another. Election can only be made by a third party with full knowledge
of the relevant facts. The election must be clear and unequivocal (e.g. obtaining judgment).
 Merger involves the idea that the principal and the agent are liable in the alternative so
that if judgment is obtained against one, the other is discharged from liability even if the
judgment is not satisfied (because, for example, the debtor is insolvent). Where the effect
of merger differs from election is that if the third party sues the agent before the agency is
disclosed there cannot be election, but the doctrine of merger may apply so that the third
party cannot later sue the principal.
Professor Reynolds ((1970) 86 LQR 318) has suggested that many of the cases treated as Go to your study pack and
merger and election could be seen as situations in which the agent contracted as principal. read ‘Election distributed’ by
Whatever the merits of this view, it does serve as a reminder that it is necessary to deter- F.M.B. Reynolds.
mine the contracting parties and whether agency is involved at all.
3.1.6 Agent-third party: liability for breach of warranty of authority

If the ‘agent’ acted without actual or apparent authority (and did not act as principal)
and the ‘principal’ has not ratified, neither will be liable on the ‘contract’ with the third
party (although see Watteau v Fenwick, in section 2.7 above). But the ‘agent’ has impliedly
contracted that authority exists and, therefore, is liable to the third party if it does not.
This warranty of authority does not extend to a promise that the main contract will be
performed.
Liability is strict. It is no defence to show that the misrepresentation was the result of an
honest, but mistaken, belief about the existence or extent of the authority, or that the
agent had no means of knowing that actual authority had ended. In Yonge v Toynbee [1910]
1 KB 215 (Sealy and Hooley, pp.170–73), a firm of solicitors was held liable when they acted
for a client without knowing that, subsequent to their appointment as agent, the client had
become insane, which illness automatically terminated their authority to act (but see Drew
v Nunn [1879] 4 QBD 661; Sealy and Hooley, pp.239–41).
The ‘agent’ will not be liable where the third party ought to have known that no warranty
of authority was being given so that the ‘agent’ was not professing to act as agent, or where
the ‘agent’ was appointed under a power of attorney and was unaware that it had been
revoked (Powers of Attorney Act 1971, s.5(1)).
Activity 3.3
What knowledge of the termination of authority must the agent have to be liable for
breach of warranty of authority?
3.1.7 Agent’s liability in tort

An agent may be liable in the tort of negligence if they have assumed responsibility to the
third party so as to give rise to a duty of care to a third party and act in a way that breaches
the duty of care and causes loss (Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830).
An agent, who makes a fraudulent misrepresentation, may be personally liable in the tort
of deceit, and here there is no requirement to show that the agent assumed responsibility
to the third party (Sealy and Hooley, p.159).
3.1.8 Agent-third party: agent’s right to sue third party

The agent cannot sue on the contract between the principal and the third party, but
there are exceptions to this general rule: for example, where the parties intend that the
agent shall be able to sue and where an agent, who is liable on a contract because of the
Companies Act 1985, s.36C, may also enforce that contract (Braymist Ltd v Wise Finance Co Ltd
[2002] EWCA Civ 127).
Activity 3.4
a What was the decision in Rayner v Grote [1846] 15 M & W 359 (Sealy and Hooley,
pp.168–70)?
b Might the result in that case have been different if there had been no performance and
the agent/principal had sought to enforce the contract, or if the buyer had not discov-
ered the identity of the principal until after delivery?
Summary
Where an agent acts within the scope of their authority, any contract is the contract of the
principal and the agent cannot sue or be sued on it, unless there is a contrary intention.
Neither the principal nor the agent will be liable on a ‘contract’ made with the third party
where the agent acted without actual or apparent authority and the principal has not
ratified. However, the third party may be able to bring an action for breach of warranty of
authority by the agent.
3.2 Relationship with third party: undisclosed principal
Essential reading
¢ Sealy and Hooley, Chapter 5: ‘Relations with third parties’, pp.176–93.
3.2.1 The undisclosed principal

This is also known as undisclosed agency. Up to this point, the law of agency in respect of
third parties seems relatively consistent in that it involves representations made by the
principal to the third party, but on entering the realm of undisclosed principals this consist-
ency vanishes. Here the existence of the agency is not disclosed: T believes the contract
is with A and is unaware that A is acting for P; nevertheless, P is entitled to intervene and
enforce the contract. It is important to note that the contract is between the agent and a
third party; the undisclosed principal, therefore, intervenes in an existing contract. There
is no legal requirement that the agency be disclosed, but one might expect that failing to
disclose would affect the relationship of the principal and agent with the third party. It may
do so, but it may not.
The doctrine is difficult to reconcile with the idea that contract rests on agreement be-
tween the parties for here the third party enters a contract only to discover that the other
contractor is merely an agent and that the contract is with someone entirely different. Lord
Lindley suggested that, ‘in the great mass of contracts it is a matter of indifference to either
party whether there is an undisclosed principal or not.’ (Keighley, Maxsted & Co v Durant
[1901] AC 240; Sealy and Hooley, pp.139, 177).
Lord Lloyd (Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199; Sealy and Hooley,
pp.176–77, 182–83) summarised the law:
(1) An undisclosed principal may sue and be sued on a contract made by an agent on his
behalf, acting within the scope of his actual authority. (2) In entering into the contract,
the agent must intend to act on the principal’s behalf. (3) The agent of an undisclosed
principal may also sue and be sued on the contract. (4) Any defence which the third party
may have against the agent is available against his principal. (5) The terms of the contract
may, expressly or by implication, exclude the principal’s right to sue, and his liability to be
sued. The contract itself, or the circumstances surrounding the contract, may show that
the agent is the true and only principal.
Where the agent acts without authority the principal cannot sue or be sued on the con-
tract. Ratification by the principal is not possible because the principal is not identified to
the third party at the time of the act by the agent.
A rule that allows an undisclosed principal to enforce the contract might tempt an agent to
enter the transaction without having the actual authority of a principal, but knowing that it
will not be difficult to find one who is willing to concoct evidence of prior authorisation, in
the unlikely event that it is necessary to produce such evidence.
There may be difficulty in distinguishing between unidentified (i.e. where the existence
of a principal is disclosed but not their identity) and undisclosed principals. Furthermore,
where the existence of the principal is undisclosed the agent will always appear to contract
as principal and it may be difficult to determine whether or not the ‘agent’ has actually
contracted as principal (United Kingdom Mutual Steamship Assurance Association v Nevill
[1887] 19 QBD 11).
Activity 3.5
What did Lord Lloyd (Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199; Sealy and
Hooley, pp.176–77, 182–83) mean when he justified the doctrine of the undisclosed principal
by reference to considerations of commercial convenience?
3.2.2 Excluding the application of the doctrine

It may be that the doctrine of the undisclosed principal is excluded by the terms of the
contract. In Humble v Hunter [1848] 12 QB 310, the description in a contract of one party as
‘owner’ of a ship excluded the possibility of admitting evidence to show he was merely the
agent for the true owner. Yet, the courts are disinclined to follow this reasoning too far.
If the courts are too ready to construe written contracts as contradicting the right of an
undisclosed principal to intervene, it would undermine the beneficial assumption in com-
mercial cases. (Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199, Lord Lloyd; Sealy and
Hooley, pp.176–77, 182–83)
Indeed, the decision in Humble v Hunter was limited in Fred Drughorn Ltd v
Rederiaktiebolaget Trans-Atlantic [1919] AC 203. The agent signed as ‘charterer’, but this did
not preclude intervention in the contract by an undisclosed principal.
If priority is to be given to the commercial convenience of the undisclosed principal

doctrine, then the fact that a written document does not reveal the agency may not be
determinative. Yet, there is a danger in construing the relationship as one of undisclosed
agency since this may be to ignore the reasonable expectations of the third party, who
believed the contract was being made with the person now said to be merely an agent.
In practice, the courts have made it relatively difficult for the third party by requiring them
to prove a negative. It is assumed that commercial parties are willing to contract with any-
one, unless an expression of unwillingness can be proved (Teheran-Europe Co Ltd v ST Belton
(Tractors) Ltd [1968] 2 QB 545, Diplock LJ). The difficulty of proving this negative can be seen
in Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199; Sealy and Hooley, pp.176–77, 182–
83). An insurance policy included a term to the effect that benefits under the policy could
not be assigned (that is, they could not be transferred to another party). Nevertheless, the
Privy Council did not think that this prevented the intervention of an undisclosed principal.
Evidence that the third party is unwilling to contract with anyone other than the ‘agent’
may be found where the contract involves a personal element, as where the third party
entered into the contract, in part, because of the personal attributes of the ‘agent’, such as
their solvency or particular skills.
Difficulty has been caused by cases in which the objection of the third party is to the per-
sonality of the undisclosed principal. In Said v Butt [1920] 3 KB 497, a theatre critic knew the
management of a particular theatre would not sell him a ticket because of articles he had
written. He obtained a ticket through an agent. It was held that the theatre could prevent the
principal from entering the theatre. McCardie J said that the critic could not assert a right as
an undisclosed principal since, as he knew, the theatre was not willing to contract with him.
The case is unusual and seems wrong. The intervention of the principal in the contract was
opposed on the grounds of his personal defects; normally, the issue has been whether the
personal attributes of the ‘agent’ are such that the principal intends only to deal with them.
The result in Dyster v Randall & Sons [1926] Ch 932 is more satisfactory. Here a developer,
knowing that a landowner would not sell to him, bought through an agent. In the course
of his judgment Lawrence J agreed with much of what had been said by McCardie J,
nevertheless, he ordered specific performance. He remarked that, ‘mere non-disclosure as
to the person actually entitled to the benefit of a contract…does not amount to misrepre-
sentation, even though the contracting party knows that, if the disclosure were made, the
other party would not enter into the contract’. It would seem that the courts favour this
approach, particularly where commercial parties are involved.
In Nash v Dix [1898] 78 LT 445, it was concluded that the third party had contracted with
someone acting as principal and not as agent. In that case, T did not wish to sell a chapel to
a Roman Catholic committee. X purchased the chapel and resold to the committee. It was
held that X had acted as principal in the purchased from T; indeed the evidence revealed
that he had made a profit on the resale.
Activity 3.6
Acme Co contracts to buy goods from Ecma Co. The price is agreed at £100. The parties also
agree that Acme can set off against payment a debt of £50 owed to it by Ecma. Mace Co now
seeks to intervene in the contract by arguing that Ecma acted as its agent.
Advise Acme.
3.2.3 Settlement by the principal paying the agent

What happens if the agent buys on behalf of an undisclosed principal in a sale and the
principal pays the agent, but the agent fails to pay the third party? In Armstrong v Stokes
[1872] LR 7 QB 598 (Sealy and Hooley, pp.191–92), a seller gave credit to A, who sometimes
dealt as principal and sometimes as agent. The seller did not inquire whether on this occa-
sion A was acting as principal or agent. Before the existence of the principal was disclosed
the principal paid the purchase price for the goods to A, but A failed to pay the seller. In an
earlier case on disclosed principals, Heald v Kenworthy [1855] 10 Exch 739, Parke B said,
if a person orders an agent to make a purchase for him, he is bound to see that the agent
pays the debt; and the giving the agent money for that purpose does not amount to pay-
ment, unless the agent pays it accordingly… I think that there is no authority for saying
that a payment made to the agent precludes the seller from recovering from the principal,
unless it appears that he has induced the principal to believe that a settlement has been
made with the agent.
In Armstrong, Blackburn J rejected the application of this principle to the undisclosed

principal because it would cause ‘intolerable hardship’. He concluded that the seller could
not sue the principal for the debt.
In support of the decision it can be argued that the third party did not have in mind the
creditworthiness of the principal, but only that of the agent. However, this decision has
been subject to a good deal of criticism. It seems wrong that an undisclosed principal
should be in a better position than a disclosed principal, who is only relieved of liability
to the third party if the principal was induced to settle with the agent by a representation
from the third party that the agent had paid the third party.
Various explanations for the Armstrong decision have been advanced.

 It was concerned with particular customs among Manchester commission agents (Irvine &
Co v Watson & Sons [1880] 5 QBD 414; Sealy and Hooley, pp.150–52), but this does not appear
in the judgment of Blackburn J.
 It was a decision about an unidentified principal (in which case the principal is liable unless
the third party has led the principal to believe the debt has been paid by the agent) and not
an undisclosed principal. But it is clear from his judgment that Blackburn J was dealing with
undisclosed principals.
 In Irvine & Co v Watson & Sons (1880) 5 QBD 414 (Sealy and Hooley, pp.150–52), the Court of
Appeal distinguished and even doubted Armstrong. Contrary to what Blackburn J actually
said, Brett LJ interpreted the decision narrowly:
Probably their decision means this, that, when the seller deals with the agent as sole prin-
cipal, and the nature of the agent’s business is such that the buyer ought to believe that
the seller has so dealt, in such a case it would be unjust to allow the seller to recover from
the principal after he paid the agent.
 The decision is wrong. While the doctrine of the undisclosed principal exists for purposes
of commercial convenience, it is important to maintain protections for the third party. In
the situation where the agent has failed to pass the payment to the third party, either the
principal or the third party will lose and it seems fairest to place the loss on the principal.
3.2.4 Defences available to the third party

The general rule is that an undisclosed principal can enforce the contract on the same
terms as the agent. This means that the third party can raise those defences that accrued
against the agent up to the point that the principal intervened. The third party can, there-
fore, plead that the debt has been settled by the third party having paid the agent, or can
use set off (that is, the third party can set off a debt owed by the agent to the third party
against the debt on the contract) (Borries v The Imperial Ottoman Bank [1873] LR 9 CP 38).
The third party may, however, only raise such defences where the third party believed the
agent was acting as principal in the transaction. The third party cannot raise these defences
where they were unconcerned as to the party with whom they were contracting (Cooke &
Sons v Eshelby [1887] 12 App Cas 271; Sealy and Hooley, pp.188–89). There are some difficul-
ties with that case. It was said that the defences could only be raised where the principal
was estopped, but this requires some representation by the principal to the third party
and, typically, the very fact of the principal being undisclosed means there will be no such
representation other than from the agent. It might be better to say that where the third
party was not deceived by the undisclosed principal or had no interest in the identity of the
principal, the third party cannot raise defences that were available against the agent.
Activity 3.7 Reading law reports (cases)

A, who owes T £1,000, enters into a contract for The judiciary have chosen to attach great importance to pre-
the sale of goods to T for £5,000 without disclosing vious cases of the senior courts (Court of Appeal and House of
that they are acting as agent for P. Lords). This importance is worked out in practise through the
T is aware that A sometimes contracts as principal doctrine of precedent.† This doctrine states that, with very
and sometimes as agent, but on this occasion limited exceptions:
makes no enquiry as to whether A is acting as  English judges must follow cases decided in superior courts
agent. Can T set off the debt owed by A?  judges in the Court of Appeal must follow other previous
decisions in the Court of Appeal
3.2.6 Merger and election  in exceptional cases, judges in the House of Lords may
decline to follow their own previous decisions.
Once the principal is disclosed they can sue or be
sued, but the third party can elect to hold either It is therefore essential to know what other cases that may be
the principal or the agent liable on the contract binding have said.
(Clarkson, Booker Ltd v Andjel [1964] 2 QB 775; Sealy You must therefore read a lot of cases!
and Hooley, pp.184–87). The courts look for an Cases are available from the online library, and you may need
unequivocal act that shows the third party has some practice in locating them. You will need your Athens
elected to proceed against either the principal details for logging in to the databases.
or the agent. The institution of proceedings con-
Citations are used throughout your subject guides. They are
stitutes evidence of an election, but this can be
the details at the end of references to cases such as these:
rebutted. In determining whether there has been
an election, it must be asked if the third party had Borries v [1995] 2 WLR 1
full knowledge of the relevant facts. Cooke & Sons v Eshelby (1887) 12 App Cas 271.
If judgment is obtained against one of the parties, You can, for example, search for these on the Westlaw data-
this amounts to merger, which precludes later base by opening the Westlaw, then clicking in ‘Westlaw UK’,
action against the other party. This is not elec- enter ‘12 App Cas 271’ in the ‘Find by citation’ slot, then click
tion because the third party may have obtained ‘go’. When the case first appears, it will be a summary. For
judgment in ignorance of the existence of the the full report, click the citation under the heading ‘where
principal and, therefore, cannot have elected. reported’.
†
For full details on precedent, see
Summary your Common law reasoning and
institutions subject guide.
Where an agent, who was acting within the scope of their actual authority, enters into a
contract on behalf of an undisclosed principal, the principal or agent may sue or be sued on Go to your study pack
the contract. The doctrine of the undisclosed principal has been justified on the grounds of and read ‘Undisclosed
commercial convenience, the argument being that in commercial contracts it is usually a principles in contract’ by A.L.
matter of no importance to the parties whether or not there is an undisclosed principal. Goodhart and C.L. Hamson,
and ‘Practical problems of
the undisclosed principle
doctrine’ by F.M.B. Reynolds.
3.3 Relationship between principal and agent

This area was covered in the previous version of this subject guide and is, typically, included
in works on commercial law, but it will not be discussed in any great detail here. The reason
is that this subject guide focuses on transactions involving the sale of goods in the way of
trade. It is concerned with the external relationship between a buyer and seller: that is,
the way an agent connects buyer to seller. As a result, the internal relationship between
principal and agent is not covered in depth, and students will not be expected to have a
detailed knowledge of this area. (Those who wish to do so can read about this area in Sealy
and Hooley, Chapter 5; Bradgate, Chapter 6. See also Tettenborn, A. ‘Principals, sub-agents
and accountability’ (1999) 115 LQR 655, where Professor Tettenborn discusses the liability of
a sub-agent (someone to whom the agent has delegated) to the principal.)
3.3.1 Duties owed by agent to principal

These can be summarised as follows:
1 Duties imposed by the terms of the agency agreement The agent must obey the
principal’s reasonable instructions and act within actual authority. The agent must perform
their duties with reasonable care and skill.
2 Duty not to delegate without the authority of the principal
3 Fiduciary duties The agent is, usually, a fiduciary. This requires the agent to perform with
honesty and good faith for the benefit of the principal. Among other things, the agent must
avoid conflicts between the interests of different principals for whom the agent is acting,
must not use the agency as a means of furthering the agent’s own interests and must
render accounts of dealings on behalf of the principal. The precise nature of the fiduciary
duties owed by an agent to a principal will depend on the terms of their contractual
relationship. It is possible to narrow the range of duties, although not to remove the core
obligations of honesty and good faith (Armitage v Nurse [1998] Ch. 241; Bristol and West
Building Society v Mothew [1998] Ch 1).
The agent’s liability for breach of contract or breach of fiduciary duty (other than the core
obligations) can be limited or excluded. This exclusion or limitation will not remove li-
ability for fraud and it may be subject to the reasonableness test under the Unfair Contract
Terms Act 1977.
If the agent is a commercial agent within the provisions of the Commercial Agents (Council
Directive) Regulations 1993 (see 3.3.4 below), certain obligations cannot be excluded or
limited (regulations 3 and 5): the obligation to look after the principal’s interests and act
dutifully and in good faith, and, in particular, the duty to make proper efforts to negoti-
ate transactions, to communicate relevant information and to comply with reasonable
instructions.
3.3.2 Duties owed by principal to agent

The duties owed to the agent have traditionally been determined by the terms of the
agency contract. The agent has a right:
 to the agreed remuneration (if any) where they have undertaken the tasks stipulated in the
agency contract
 to be reimbursed for expenses that have been agreed or are reasonable
 to be indemnified against liabilities incurred in performing duties under the agency con-
tract, but not for liabilities (or expenses) incurred when acting in excess of authority, unless
the principal has ratified.
There is an implied promise that the principal will not undermine the agency contract: e.g.
they will provide a sufficient quantity of goods to keep the agent’s customers reasonably
satisfied (Turner v Steinhoff UK Furniture Ltd [2006] Eu LR 50 (County Court)).
3.3.3 Termination of the agency

The agency will, usually, be terminated by:
 completion of the task for which the agent was appointed or the expiry of the period of
time for which the agent was appointed
 agreement
 revocation by the principal, unless the agency is irrevocable
 death, or insanity of the principal or agent
 winding-up or dissolution, where the principal or agent is a company
 insolvency of the principal or, possibly, the agent.
3.3.4 Commercial Agents Regulations

The Commercial Agents (Council Directive) Regulations 1993 (as amended) are part of the
broader attempt to harmonise commercial law across the European Union.
Regulation of agent-principal relations is more common in other countries than in the

United Kingdom. In the UK, the focus has been on protecting the principal by placing du-
ties on the agent and by subjecting particular types of agent to statutory regulation (e.g.
under the Financial Services and Markets Act 2000). Elsewhere in Europe, there has been an
awareness of the need to protect the agent. One major concern was that, having built up
business, the agent’s principal might dispense with their services and deal directly with the
clients. The 1993 regulations seek to provide commercial agents with a degree of protec-
tion similar to that enjoyed by employees.
The regulations cover commercial agents. Under regulation 2(1) a commercial agent is a
self-employed intermediary (including a company, but not an employee of the principal,
nor someone in business as a principal) with a continuing authority to negotiate (see Parks
v Esso Petroleum Co Ltd [2000] Tr LR 232), or to negotiate and conclude, the sale or purchase
of goods on behalf of the principal (see also the schedule to the regulations). Someone
whose agency activities are secondary is not a commercial agent: secondary is defined in
schedules to regulations 2(3)-(4) (see Tamarind International v Eastern Natural Gas [2000]
Eur LR 709). Estate agents are not commercial agents because they merely introduce prin-
cipals and do not negotiate and are not involved in the sale or purchase of goods. Whether
or not someone is a commercial agent depends on the particular circumstances of the
relationship between the parties (see Mercantile International Group plc v Chuan Soon Huat
Industrial Group Ltd [2002] EWCA Civ 288).
The commercial agent’s duty to the principal is to act ‘dutifully and in good faith’ (regula-
tion 3). This would seem to mirror the pre-regulation requirements under English law. The
agent is required to comply with the principal’s reasonable instructions, to make proper
efforts in negotiations on the principal’s behalf, and to communicate with the principal.
The principal is obligated to act dutifully and in good faith towards the agent and must,
in particular, provide documentation and information required for the agent to perform
his or her functions, give reasonable notice of a downturn in business, and keep the agent
informed as to the conclusion (or not) of transactions. In determining the content of the
principal’s duty of good faith a balance is struck between the interests of the agent and
the business interests of the principal, and to show a breach of the duty of good faith it is
necessary to prove malice or bad faith (Simpson v Grant & Bowman Ltd [2006] Eu LR 933).
Significantly, neither the agent nor the principal can contract out of their obligations.
The regulations set out the agent’s entitlement to remuneration. They also stipulate the
circumstances in which the agency terminates and rights to notice and compensation
and/or indemnity.

Agatha is appointed by Toytoys Ltd to act as its agent in the purchase of toys, which will be
sold through its shops. Agatha is instructed to obtain the consent of the company’s board
of directors before making any purchase above £10,000. Agatha has undertaken various
actions.
i Christie, a toy manufacturer, contacts Agatha offering to sell a consignment of toys.
Christie is in financial difficulties and, therefore, offers the toys for £30,000, which
represents a substantial discount on the normal price, but Christie requires an immedi-
ate decision. Agatha says, ‘I don’t really have the authority for such a large transaction,
but the board usually backs my opinion on such matters, especially in an emergency
like this.’ Agatha, therefore, agrees to buy on behalf of Toytoys. The next day, Christie
receives a better offer for the toys from another toy retailer. Christie telephones Agatha
and says he is withdrawing from the deal. That afternoon, the board of directors of
Toytoys decides it wishes to go ahead with the purchase from Christie.
ii Agatha is offered toys for £15,000 by Dan. Dan knows Agatha does not have the author-
ity to conclude the deal and so suggests that she seek such authority from the board of
directors of Toytoys. The next day, Agatha tells Dan that she has been given the neces-
sary authority. The deal is concluded. In fact, the meeting of the board of directors had
been postponed because of illness, and Agatha, who was concerned about the possibil-
ity of losing the deal and convinced that the board would give its approval, had decided
to lie to Dan. The board of directors later decides it does not wish to proceed with the
purchase from Dan.
iii Esmond, who is a toy manufacturer, knows that Agatha works as an agent for several
companies, including Toytoys. Agatha is aware that Esmond has had serious problems in
the past with Toytoys over its alleged failure to pay for goods on time and that because
of this Esmond has made it clear that he does not want to trade with Toytoys. Agatha
enters into a deal with Esmond. Later, Esmond discovers that Agatha is acting as agent
for Toytoys and he refuses to continue with the deal.
Advise Toytoys as to its rights and obligations in relation to Christie, Dan and Esmond.
Advice on answering the question

The best approach to a problem question is also the most obvious, work through from
first sentence to last. Too often students ignore this advice and plunge into the middle of a
question.
Identify the factual issues and then the applicable law. Set out and discuss the legal princi-
ples you think are relevant before trying to apply them.
i The key point here is the statement by Agatha that she does not have authority to under-
take the transaction. Moreover, when she says that ‘the board usually backs my opinion’,
even if this is true, it amounts to an admission that sometimes the board does not back her
opinion. It would seem, therefore, that when Agatha ‘agrees to buy on behalf of Toytoys’
that is not what is happening. Christie is aware that Agatha has no authority to accept an of-
fer and that such acceptance can only be made by the board of directors. If this is the case,
there is no agreement for the board to ratify because ratification requires the agent to
purport to act for the principal, which Agatha seems not to be doing. It is worth just noting
that, in view of the statements about her actual authority, Agatha does not have apparent
authority, implied actual authority and Watteau v Fenwick does not apply, and there is no
agency of necessity. Finally, since the question asks candidates to advise Toytoys as to its
rights and obligations in relation to Christie, discussion of the obligations owed by Agatha
is irrelevant.
ii A good answer would focus on a discussion of the contrasting decisions in First Energy Ltd
v Hungarian International Bank Ltd and Armagas Ltd v Mundogas SA. What is the distinction
between these cases? What did the manager in First Energy have apparent authority to do?
Which of these cases is closer to the facts in the problem? Again, discussion of Agatha’s
liabilities is not required by the question.
iii Esmond is not aware that Agatha is acting as agent for Toytoys, but has expressed his desire
not to trade with that company. Do not restrict the discussion to Said v Butt. A good answer
would consider whether that decision is the leading authority in light of cases such as
Dyster v Randall & Sons, Nash v Dix, and, in particular, Siu Yin Kwan v Eastern Insurance Co Ltd.
The application of these cases to this situation is made even more likely by the fact that
Esmond showed no interest in asking Agatha for whom she was acting. This assumes that
there is an undisclosed agency. The best students will discuss whether this is an example of
an undisclosed agency or whether it is disclosed agency where the principal is unidentified
since we are told that Esmond knows Agatha acts as an agent.
Reflect and review

Look through the points listed below:
Are you ready to move on to the next chapter?
Ready to move on = I am satisfied that I have sufficient understanding of the principles

outlined in this chapter to enable me to go on to the next chapter.
Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.
Need to study again = I found many or all of the principles outlined in this chapter very
difficult and need to go over them again before I move on.

I can explain the rights and obligations owed by the

principal and by the agent to the third party. ¢ ¢ ¢
I can explain the rights and obligations owed by the

third party to the principal and to the agent. ¢ ¢ ¢
I can explain the rights and obligations arising

between the principal and the agent. ¢ ¢ ¢
Must Revision
revise done
3.1 Relationship with third party: disclosed principal ¢ ¢
3.2 Relationship with third party: undisclosed principal ¢ ¢
3.3 Relationship between principal and agent ¢ ¢

4 Sale of goods: contract, property and risk
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
4.1 The Sale of Goods Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
4.2 What is a contract of sale of goods? . . . . . . . . . . . . . . . . . . . 59
4.3 Components of the sale contract . . . . . . . . . . . . . . . . . . . . . 61
4.4 Passing of property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
4.5 Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
4.6 Perishing of goods and frustration of contract . . . . . . . . . . . . . . 72
4.7 Transfer of title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

Introduction
The contract for the sale of goods is at the centre of this course. Sale contracts are a branch
of the general law of contracts and the principles that you studied in the Elements of the law
of contract subject guide apply here. Indeed, many of the cases you studied as part of that
course involve sale contracts. There are, however, some special features of sale contracts. The
most significant are the terms implied into the sale contract by the Sale of Goods Act 1979.
In this chapter we look at the Sale of Goods Act,† the definition of a sale contract, the rules †
Note: the Sale of Goods Act 1979
on the passing of property and risk, and transfer of title. Chapter 5 considers delivery and is referred to here as ‘the Act’
acceptance of the goods and the implied terms in a sale contract. Chapter 6 deals with the or ‘SGA’. References to sections
remedies available to the parties where there has been a breach of the contract. from the Act are merely noted
by their section number: for
It is worth noting that in some aspects this Act distinguishes between consumer and non-
example, ‘s.14(1)’ refers to section
consumer sale contracts. This part of the course concentrates on the latter, that is, on sales
14(1), Sale of Goods Act 1979.
between business people.
Learning outcomes
By the end of this chapter and the relevant readings you should be able to:
 discuss the approach taken to interpretation of the Sale of Goods Act
 analyse the components of the definition of a contract of sale
 explain the circumstances in which property in goods is passed
 discuss and illustrate the exceptions to the nemo dat rule.
Essential reading
The main reading is Sealy and Hooley, but you should be aware that a number of books on
contracts of sale are available and are worth consulting.
 Atiyah, P.S., J. Adams and H. MacQueen The sale of goods. (London: Longmans, 2005)
[ISBN 9780582894085].
 Bridge, M. The sale of goods. (Oxford, Oxford University Press, 1998)
[ISBN 9780198765355].
 McKendrick, E. (ed.), Sale of goods. (London: LLP Professional Publishing, 2000)
[ISBN 9781859783058].
 For the issues raised in this chapter of the subject guide you can also consult Bradgate,
pp.219–44, 365–437.
Commercial law 4 Sale of goods: contract, property and risk page 57
4.1 The Sale of Goods Act
4.1.1 The Act

The original Sale of Goods Act 1893 was an attempt to codify much of the common law on
sale contracts. The Act, therefore, was shaped by the fact that the case law on sales was
mainly concerned with sale for the purpose of trading (for example, a manufacturer of
goods selling to a retailer of goods) rather than for consumption (for example, a sale by a
retailer to a consumer). By the late twentieth century there was recognition that the princi-
ples derived from such contracts might not serve the needs of consumers.
In providing greater protection for the consumer, the Sale of Goods Act 1979 was part of a
shift from the general principle of caveat emptor, according to which it was for the buyer
to ensure goods did not suffer from any defects (see s.14(1), discussed in 5.5 below), to a
position where the seller is obliged to ensure that goods do not suffer from certain types of
defects, or that the buyer is made aware of such defects before the sale. This shift affects all
buyers, including business people.
The change of emphasis from sale for trade to sale for consumption is also illustrated by
the change in the main implied term as to quality. In the 1893 Act goods were required to
be of ‘merchantable quality’, which assessed quality according to their value in trade. This
has been replaced by a requirement that goods be of satisfactory quality (s.14(2)), which
emphasises issues of consumption.
This shift in the Act has been reinforced by the Unfair Contract Terms Act 1977 and by the
Sale and Supply of Goods to Consumers Regulations 2002, which restrict the ability of sell-
ers to contract out of their obligations and which give greater protection to consumers (as
opposed to commercial buyers, who are, however, not ignored by the 1977 Act).
Yet it would be wrong to characterise the recent history of sales law as simply concerned with
the problems of buyers. For instance, there has been some relaxation of the rules in the con-
text of sales between business people: for example, s.15A (introduced into the SGA in 1994) has
made it more difficult for the non-consumer buyer to reject defective goods (see Chapter 6).
In spite of the development of distinctions between the law applying to commercial

(business-to-business sales) and the law applying to consumer sales (business-to-private-
buyer sales), the rules remain mixed together in the same legislation: the SGA and related
statutes, such as the Unfair Contract Terms Act 1977. This has led to confusion and to calls
for separate codes for the different types of sale.
4.1.2 Interpreting the Sale of Goods Act 1979
Essential reading
¢ Sealy and Hooley, Part III: ‘Domestic sales law’, Chapter 7: ‘Introduction and definitions’,
pp.245–47.
The Sale of Goods Act 1893 was meant to codify the common law on contracts for the sale
of goods, although in truth it is only a partial code because key areas of contract law are not
fully covered or are entirely omitted (for example, formation and misrepresentation). The
general principles of contract law are, therefore, still relevant (see s.62(2)).
The approach to interpreting codifying statutes was laid down by Lord Herschell in a case
on the Bills of Exchange Act 1882:
I think the proper course is in the first instance to examine the language of the statute and
to ask what is its rational meaning, uninfluenced by any considerations derived from the
previous state of the law, and not to start with inquiring how the law previously stood, and
then, assuming that it was probably intended to leave it unaltered, to see if the words of
the enactment will bear an interpretation in conformity with this view. (Bank of England v
Vagliano Brothers [1891] AC 107).
Atkin LJ confirmed that this was the correct approach to the SGA: ‘Inasmuch as we are now
bound by the plain language of the Code I do not think that decisions in cases before 1893
are of much value’ (Re Wait [1927] 1 Ch 606; Sealy and Hooley, p.246). Yet, what this means
is not always clear. Indeed, Atkin LJ followed the statement quoted above by referring to
two pre-1893 cases. In Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC 454, Lord Upjohn
explained, ‘Your Lordships were properly referred to authorities in the nineteenth century,
for section 14(2) only put the common law as it had been established into a statutory code.’
(Also Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd’s Rep 240; Sealy and
Hooley, pp.320–22.)
The most recent version of the Act was passed in 1979 and that Act has been amended
in 1994, 1995 and 2002. Interpreting the legislation rests on the pretence that the Act,
including provisions drawn from the 1893 Act, was written at one time. Potter LJ explained
(Stevenson v Rogers [1999] QB 1028):
The [Sale of Goods] Act of 1979 forms a single code; however, that is upon the basis simply
that it consolidates and enacts within one statute and without material amendment a
number of disparate statutes previously governing the field of sale of goods. While, in the
first instance, a consolidating Act is to be construed in the same way as any other, if real
doubt as to its legal meaning arises, its words are to be construed as if they remained in
the earlier Act. Thus, in terms of the proper construction of its provisions, the Act of 1979 is
not to be regarded as more than the sum of its parts.
Lord Diplock (Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441) proposed a differ-
ent method of interpretation. He drew attention to the danger of not allowing the law to
develop and so restrict the freedom of the parties to engage in more sophisticated agree-
ments than were envisaged by the courts in the nineteenth century. He urged that,
the Act ought not to be construed so narrowly as to force upon parties to contracts for Go to your study pack
the sale of goods promises and consequences different from what they must reasonably and read the extract from
have intended. Instead, [its provisions] should be treated as illustrations of the application Ashington Piggeries Ltd v
to simple types of contract of general principles for ascertaining the common intention Christopher Hill Ltd.
of the parties as to their mutual promises and their consequences, which ought to be ap-
plied by analogy in cases arising out of contracts which do not appear to have been within
the immediate contemplation of the draftsman of the Act in 1893…I believe that the basic
principle of the English common law of contract, including that part of it which is codified
in the Sale of Goods Act 1893, is to give effect to the common intention of the parties as
to their mutual promises in the sense that I have just described, I prefer to deal with each
appeal by considering first the transaction between the buyer and the seller in the light of
common sense and good faith in business, before examining the particular provisions of
the code upon which the parties rely.
Activity 4.1 ‘Giving your own views’

What problems are posed by In response to Activity 4.1, we expect you to make your own judgment as to what
Lord Diplock’s approach to the problems are in Lord Diplock’s approach. You should make your own analysis
interpreting the SGA? and give your opinion.
Universities want their students to be independent thinkers who can express
their own opinions based on the material they have studied. This means making
up your own mind about the principles and objectives that ought to guide legal
processes.
Perhaps you are not sure what your views are? If so: note down the main issues
and see how they relate together; ask other students what they think; discuss
– and argue – your views with them. Students who simply list all their knowledge,
or repeat ‘model answers’ will not receive good marks in the examinations.
Higher education is about thinking as well as learning. You do not have to accept
the standard views and explanations of any subject. For example, although the
LLB degree explains and supports the common law, you may take the view that
civil law systems are superior to common law systems. You may decide that there
are few, or no problems in Lord Diplock’s approach. This is perfectly acceptable, if
you can support this view with reasoned arguments.
No-one will object to that – provided that you can produce logical arguments and
evidence for your views. The only requirement is that you must be able to argue
your position with supportive evidence and reasons.
See ‘being an independent learner’ and critical thinking in the Learning skills for
law guide.
4.2 What is a contract of sale of goods?
Essential reading
¢ Sealy and Hooley, Chapter 7: ‘Introduction and definitions’, pp.257–72.
The SGA defines a contract of sale of goods as:

a contract in which the seller transfers [called a sale: s.2(3)] or agrees to transfer [an agree-
ment to sell: s.2(4)] the property in goods to the buyer for a money consideration, called
the price (s.2(1)).
It is worth noting that ‘property’ refers to the title to the goods and not the goods
themselves.
Before looking more closely at this definition, it is worth considering some transactions
that are excluded.
Transactions that are not sales

Contract of bailment This is where goods are delivered on terms requiring their return
to the owner or to another party. Although the person holding the goods under such a
contract has certain rights and obligations, there is no intention that property will pass.
Contract of hire purchase Typically, this is a means by which someone can buy goods
by making payments over a period of time. However, it is not a sale because, while the
intention is that the buyer will own the goods when all the payments have been made, the
passing of property will only occur if the buyer chooses to exercise an option under the
contract to that effect. There is no obligation on the buyer to exercise this option (Helby v
Matthews [1895] AC 471; Sealy and Hooley, pp.263–64). This does mean that there will be a
sale if the contract stipulates that property will pass at some specified time in the future
(Forthright Finance Ltd v Carlyle Finance Ltd [1997] 4 All ER 490; Sealy and Hooley, p.264). This
will be an agreement to sell (s.2(5)) as opposed to a contract of sale where the property
passes at the time of the contract (s.2(4)), but both are within the SGA (see section 4.3.3,
below). See the criticism of the distinction between hire-purchase and sale contracts made
by Sealy and Hooley, p.265.
Security interests Where someone (the chargor) grants an interest in goods in favour
of another (the chargee) as security for a loan or some other form of credit, the chargor
retains property in the goods. The chargee does acquire a proprietary interest in the goods,
which will cease when the debt is paid (Sealy and Hooley, p.266).
Agency contracts Where A buys goods from T on behalf of P and P has authorised or later
ratifies the purchase, there is an agency contract between P and A and a sale contract
between P and T. Contrast this with the situation where A acts as a principal so that there a
sale contract between T and A and another between A and P. (See Chapter 2 above.)
Contract for work and materials This is a contract involving skill and labour as well as
the transfer of property in goods, such as the painting of a portrait by an artist (Sealy and
Hooley, pp.266–70). Where the work element can be separated from the goods, as where a
gas fitter installs a new central heating boiler, one might be able to suggest there are two
contracts, one for the labour (contract for work) and one for the boiler (contract of sale).
The problem arises where the work done by the fitter is very defective and the householder
wishes to reject the boiler. This may not be possible because the boiler is not defective
and there is, therefore, no breach of the sale contract, only a breach of the contract for
labour. Where the goods and labour are mixed together, the test applied to decide if it is
a contract of sale or a contract for skill and labour is to look at its substance. If an artist is
commissioned to paint a portrait, the fact that materials, such as paint and canvas, will also
pass under the contract does not make it a contract of sale of goods. Greer LJ thought the
test involved determining if the skill is ‘only ancillary’ or if ‘the substance of the contract is
the skill and experience of the artist in producing the picture.’ (Robinson v Graves [1935] 1
KB 579; Sealy and Hooley, pp.268–69). The distinction in that case was between the portrait
painter and the maker of a set of dentures: it was concluded that in the latter situation
there is a sale of goods because ‘the principal part of that which the parties are dealing
with is the chattel which will come into existence when such skill as may be necessary to
produce it has been applied’.
This makes it seem as though the distinction rests on an assessment of what is and is not
skill or art. The test might be, ‘do the goods in question acquire the bulk of their value from
the work applied in making them so that the goods are increased to an extent that substan-
tially exceeds their value in a raw state?’ But this is too vague: dentures are made up from
cheap raw materials and it is the process of forming these into dentures that adds value.
Moreover, such a general rule contradicts some of the things said in one leading case (Lee v
Griffin [1861] 30 LJQB 591). In truth, the judgments in Robinson were, perhaps, too loose to be
able to discern any clear principle. Problems have resulted from attempts in some cases to
work up a specific set of facts into a general rule so as to legitimise an outcome when really
the distinction between these types of contract ‘depends on the particular nature of each
individual contract’ (Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC 454, Lord Upjohn).
The significance of the distinctions between some of these contracts has diminished,
although not entirely vanished. In Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC 454
(but contrast Lord Upjohn’s approach with that of Lord Wilberforce), the House of Lords
took the view that, as far as possible, the same principles should be applied whether goods
were supplied under a sale contract or a contract for work and materials. This has been re-
inforced by the Supply of Goods and Services Act 1982, which implies terms with respect to
the goods supplied that largely match those implied into a contract for the sale of goods.
That Act also imposes on the supplier the duty to exercise reasonable care and skill in
respect of the service that is supplied (Supply of Goods and Services Act 1982, s.13). Similar
terms are implied into hire purchase contracts by the Supply of Goods (Implied Terms) Act
1973, although significant differences remain between sale and hire-purchase contracts.
Summary
A sale contract is defined by s.2(1) SGA. The components of that definition must be present,
so where there is no transfer of property it is not a sale. The importance of the distinctions
between sale contracts and other types of contracts involving goods has been reduced
– but has not entirely vanished – because, in so far as is possible, the same principles are
applied to different types of contracts involving the supply of goods.
4.3 Components of the sale contract

The components of the definition in s.2(1) (see 4.2, above) are examined in this section.
4.3.1 Price
Essential reading
¢ Sealy and Hooley, Chapter 7: ‘Introduction and definitions’, pp.258–61, 272.
The price must be a money consideration. This includes payment by credit card, but
excludes contracts of barter (for example, the exchange of goods involving no payment).
If the parties have not fixed a price, they may not have reached agreement in which case
there is no contract (but see s.8, 9).
Activity 4.2
a Jake wishes to buy a new car priced at £7,000 from Mary, a dealer. Mary agrees to take
Jake’s old car and to reduce the price of the new car by £1,000. How would you charac-
terise the transaction?
b If goods are sold for 10 pence plus three wrappers from a chocolate bar, does the trans-
action fall within SGA?
4.3.2 ‘Goods’
Essential reading
The word ‘goods’ in s.2(1) includes:

all personal chattels other than things in action and money…and in particular ‘goods’
includes emblements,† industrial growing crops, and things attached to or forming part †
Emblement = ‘the profits of
of the land which are agreed to be severed before sale or under the contract of sale; and sown land’, particularly annually
includes an undivided share in goods (s.61(1)). harvested grass, grain or fruit,
etc.
The Act does not apply to land (real property), nor shares and cheques (choses or things in
action) or bank notes (money). Computer software has caused some difficulties and may
not be covered by the SGA. Glidewell J took the view that the SGA does not apply, but went
on to imply terms into the contract, which resembled those implied by the SGA, and so im-
posed strict liability for a defective software programme (St Albans City and District Council
v International Computers Ltd [1996] 4 All ER 481). The sale of bank notes that are not legal
tender would be subject to the Act since their value derives from the notes themselves and
not from their role as legal tender (Moss v Hancock [1899] 2 QB 111). The Act does cover crops
that are attached to the land, although these are also land within the meaning of the Law of
Property Act 1925, s.205 (Kursell v Timber Operators and Contractors Ltd [1927] 1 KB 298; Sealy
and Hooley, p.253).
Under s.61(1) ‘goods’ includes an undivided share in goods so that a contract of sale in-
cludes the sale of part of a larger, undivided bulk of goods. We will discover the significance
of this when we come to discuss the passing of property in goods (see section 4.4 below).
4.3.3 ‘Transfers or agrees to transfer the property’
Essential reading
While the price is the benefit received by the seller, the buyer receives both the goods and
property in the goods. If one party becomes insolvent the question of who owns the goods
– or, in the words of the Act, has property in them – determines whether the other party
joins the ordinary creditors or is able to claim the goods themselves. In addition, since
risk usually runs with property (s.20(1); section 4.5 below), who has property will often
settle the question of who bears the loss if goods are damaged or destroyed (see Sealy and
Property
The concept of property in English law is elusive and there is not sufficient space in this
guide to consider all its nuances. Nevertheless, it is worth making one or two observations.
A property right is the connection between an individual and a thing:
The touchstone of a property right is its universality: it can be asserted against the world
at large and not, for example, only against another individual such as the contracting
partner. If, under a contract of sale, I acquire the ownership of a chattel, my property right
to the chattel may be asserted not just against the seller but against the whole world. (M.
Bridge Personal Property Law. (Oxford: Oxford University Press, 2002), p.12.
If A sells her car to B, B can assert the property right acquired, not only against A, but also
against others even though they are not parties to the contract. Contrast this with contrac-
tual rights, which have only a limited impact on third parties because of the doctrine of
privity.
But what does it mean to own goods? With a few exceptions, such as ships and aircraft,
there is no register for the ownership of goods, so how does someone establish ownership?
It is established through possession: the owner is the person with the best possessory title
to the goods.
Property in SGA
Section 2 refers to sales as contracts where the seller:
i transfers, or
ii agrees to transfer property in goods.
The Act covers two distinct aspects, the contract to transfer and the transfer itself: in (i)
these occur simultaneously, while in (ii) they are separated.
What is the ‘property’ that is being transferred? According to s.61(1) it is ‘the general
property in goods, and not merely special property’. This means the seller is transferring, or
agreeing to transfer, the absolute legal interest in the goods, so the transfer of something
less than the seller’s full legal interest does not constitute a sale: for example, bailment
does not come within the SGA because it does not transfer the owner’s absolute legal inter-
est in the goods, it just transfers possession. But absolute legal interest does not mean the
transfer of perfect legal title. Indeed, various parts of the Act are concerned with situations
in which a buyer acquires title where the seller had a defective title or no title at all (for
example, ss.12(3) and 21–26, see 4.7 below).
Categorisation of goods
The passing of property is connected with the way the Act categorises goods as existing
or future and as specific or unascertained. This categorisation occurs at the time of the
contract.
Existing goods are those owned or possessed by the seller at the time of the contract (s.5(1)).
Future goods are to be manufactured or acquired by the seller after the making of the con-
tract (s.5(1)). So, if the goods do not yet exist or exist but are the property of someone other
than the seller, they are future goods: for example, the sale by Jake to Pugwash of a Bentley
motor car is a sale of future goods if Jake does not own the car at the time of the contract,
but intends to acquire it (Varley v Whipp [1900] 1 QB 513). There cannot be a sale of future
goods, only an agreement to sell (s.5(3)), but this still falls within the SGA (s.2).
Specific or unascertained goods Existing and future goods will also be specific or unascer-
tained goods. Under s.16, property will not pass in goods that are not ascertained (Re Wait
[1927] 1 Ch 606; Sealy and Hooley, p.246; but see s.20A discussed in section 4.4.8). The dis-
tinction between specific and unascertained goods depends on when they are identified:
 if the goods are identified and agreed upon at the time of the contract they are specific
goods (s.61(1))
 if they are not identified at the time of the contract they are unascertained goods.
The sale of ‘my Bentley’ is a sale of existing and specific goods if I only have one Bentley. I
cannot perform the contract by substituting another Bentley, even if it has precisely the
same specifications.
Typically, future goods will be unascertained. If the buyer agrees to buy a new Bentley from
a dealer, who does not have what is required in stock, this is a sale of future and unascer-
tained goods. However, goods that exist and are identified in the contract, but are owned by
a third party, are both future goods (because the seller has not acquired them) and specific
goods (because they are identified at the time of the contract) (Varley v Whipp [1900] 1 QB
513): for example, the sale by Jake to Pugwash of the Bentley, which is at the time of the con-
tract owned by Mary from whom Jake intends to acquire it, is a sale of future, specific goods.
Ascertained goods Where there is a contract for the sale of unascertained goods, once the
goods are identified and connected by consent of the parties to the contract (‘appropri-
ated’: section 4.4.6 below), they become ascertained goods. The significance of this is that
while goods are unascertained no property in them can pass to the buyer and the buyer
has, therefore, only a contractual right against the seller and has no rights in any goods (see
section 4.4.1). Property can only pass when the goods become ascertained. The rules on
passing of property are discussed below (see 4.4). For the moment it is worth noting one
of the problems with the rule that property cannot pass in unascertained goods. In Re Wait
[1927] 1 Ch 606 (Sealy and Hooley, p.246), 500 tons of wheat were sold from a cargo of 1000
tons that was on board a ship, Challenger. When the seller went into liquidation, the court
held that the sale was of unascertained goods and so under s.16 property had not passed to
the buyer at the time of the contract. The buyer could not, therefore, claim the goods and
merely joined the other general creditors. Similarly, in Re Goldcorp Exchange Ltd (in receiver-
ship) [1995] 1 AC 74, customers of a company purchased bullion for future delivery on terms
that they were buying ‘non-allocated metal’, which meant it was not set aside but was
stored as part of the company’s general stock. Under the agreement, an investor had the
right to take physical delivery of bullion from that stock. The company became insolvent.
The Privy Council held that the goods were unascertained and property had not passed
because the company was free to decide what bullion to allocate to a particular investor.
Useful further reading Go to your study pack

¢ Bridge, M. Personal property law. (Oxford: Oxford University Press, 2002) and read ‘The concepts
[ISBN 0199254761] particularly, pp.12–15, 26–27, 28–31, 80–93. of “property”, “title” and
“owner” used in the Sale
¢ Goode (2004), pp.31–45.
of Goods Act 1893’ by G.
Battersby and A.D. Preston
Summary and ‘A reconsideration of
“property” and “title” in the
The passing of property is determined, in part, by the categorisation of the goods as either
Sale of Goods Act’ by the
existing or future and as either specific or unascertained. Into which categories goods
same authors.
fall depends on the situation at the time of the contract. Existing goods are owned by the
seller, while future goods are not. Specific goods are identified at the time of the contract,
while unascertained goods are not. Unascertained goods become ascertained when
they are appropriated to the contract with the consent of both parties. These rules are
important because, normally, property will not pass in unascertained goods (subject to an
exception dealt with in 4.4.8).
Activity 4.3
How would you categorise the following (put your answers into the grid):
a 100 tons of wheat to be harvested from a particular field next summer.
b A particular second-hand reaping machine owned by someone other than the seller.
c A book ordered from an internet bookseller.
d A bag of flour taken from the shelf in a supermarket by a customer.
Specific Unascertained
Existing
Future Go to your study pack

and read the extract from
Think of other goods that you have bought recently and put them into the relevant parts of Personal property law by
the grid. M. Bridge.
4.4 Passing of property
Essential reading
¢ Sealy and Hooley, Chapter 8: ‘Passing of the property in the goods as between buyer and
seller’, pp.293–327.
4.4.1 General principles

i ‘The right of property and the right of possession are distinct from each other; the right of
possession may be in one person, the right of property in another.’ (Tarling v Baxter [1827] 6
B & C 360, Sealy and Hooley, p.303, Bayley J). The distinction is demonstrated by the facts of
Dennant v Skinner and Collom [1948] 2 KB 164 (Sealy and Holley, pp.303–304), in which Roche
J also notes that a seller, who, while not having property, remains in possession of the
goods, has rights against a buyer who fails to pay (see 6.2).
ii ‘Where there is a contract for the sale of unascertained goods no property in the goods
is transferred to the buyer unless and until the goods are ascertained.’ (s.16) This is based
on what Lord Mustill called ‘a priori common sense’, which ‘dictates that the buyer cannot
acquire title until it is known to what goods the title relates’ (Re Goldcorp Exchange Ltd (in
receivership) [1995] 1 AC 74). But this general principle is subject to an important exception
in s.20A (discussed in 4.4.8 below).
iii Where the goods are specific or ascertained property will pass when the parties ‘intend it
to be transferred’ (s.17(1)). To determine their intention ‘regard shall be had to the terms
of the contract, the conduct of the parties and the circumstances of the case’ (s.17(2)).
Property may still pass even though the time for payment or delivery has not arrived (but
see the remarks of Diplock LJ quoted in section 4.4.2 below).
iv If no such intention can be discerned, the Act provides rules in s.18 to resolve the issue of
when the property is to pass (see section 4.4.2 below). With the exception of rule 5, these
rules are concerned with the passing of property in specific goods.
v The courts have always rejected the idea that under a sale contract the buyer may acquire
an equitable interest in the goods. Atkin LJ said in Re Wait [1927] 1 Ch 606 (see also Lord
Brandon in Leigh v Sillavan Ltd v Aliakmon Shipping Co Ltd, The Aliakmon [1986] AC 785):
It would have been futile in a code intended for commercial men to have created an
elaborate structure of rules dealing with rights at law, if at the same time it was intended
to leave, subsisting with the legal rights, equitable rights inconsistent with, more exten-
sive, and coming into existence earlier than the rights so carefully set out in the various
sections of the code.
Nevertheless, he did go on to say that the provisions in the Act have:

no relevance when one is considering rights, legal or equitable, which may come into
existence dehors [outside] the contract for sale. A seller or a purchaser may, of course,
create any equity he pleases by way of charge, equitable assignment or any other dealing
with or disposition of goods, the subject matter of sale; and he may, of course, create such
an equity as one of the terms expressed in the contract of sale.
The parties may, therefore, agree in the sale contract that the goods are to be held by
the seller on trust for the buyer. The parties must intend to create a trust and to limit the
freedom of the seller to deal with the goods, and the goods must be clearly identified. An
attempt to establish a trust in relation to unascertained goods would fail to satisfy the sec-
ond of these criteria. See Re London Wine Co (Shippers) Ltd [1986] PCC 121, Sealy and Hooley,
pp.294–98; Re Goldcorp Exchange Ltd (in receivership) [1995] 1 AC 74). But see also Re Stapylton
Fletcher Ltd [1995] 1 WLR 1181 (section 4.4.8).
Activity 4.4
Why did the court not give full recognition to the apparent intention of the parties in Re Practise your spoken english
Blyth Shipbuilding and Dry Docks Co Ltd [1926] Ch 494? We would advise you to
make an oral answer in
response to this activity.
4.4.2 Section 18, rule 1: goods in a deliverable state

Where there is an unconditional contract for the sale of specific goods in a deliverable
state the property in the goods passes to the buyer when the contract is made, and it is
immaterial whether the time of payment or the time of delivery, or both, be postponed.
In spite of its wording, Diplock LJ remarked of this rule: ‘the governing rule is in s.17, and
in modern times very little is needed to give rise to the inference that property in specific
goods is to pass only on delivery or payment’ (RV Ward Ltd v Bignall [1967] 1 QB 534).
The phrase ‘unconditional contract’ cannot mean that a contract must not have conditions
of any sort because all contracts of sale have conditions, such as that the buyer will pay
and the seller will deliver and the goods will be of satisfactory quality. ‘Unconditional’ must
refer to something in the contract of sale that prevents the operation of rule 1, and this
would include the situations in rules 2 and 3.
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’ (s.61(5)). In Underwood Ltd v Burgh Castle
Brick & Cement [1922] 1 KB 123 (Sealy and Hooley, pp.306–307), a machine was attached to a
factory floor and, therefore, was not in a ‘deliverable state’ until detached.
It is only when the seller must do something that this rule may prevent property from pass-
ing and not if, for example, a contract term requires the buyer to detach the machine.
There is a difficulty with future, specific goods, which would seem to come within rule 1.
This is resolved by s.5(3), which states that a contract to effect a present sale of future
goods is treated as an agreement to sell goods so that property will not pass until the seller
acquires title or the buyer acquires title through an exception to the nemo dat rule (Goode
(2004), p.232. On the meaning of the nemo dat rule see section 4.7 below).
Activity 4.5
A farmer agrees to sell all of the trees on his land; the trees are to be cut down a month
after the agreement and payment is to be made at that time. At what point does the prop-
erty in the trees pass?
4.4.3 Section 18, rule 2: goods not in deliverable state

Where there is a contract for the sale of specific goods and the seller is bound to do some-
thing to the goods for the purpose of putting them into a deliverable state, the property
does not pass until the thing is done and the buyer has notice that it has been done.
This covers the situation where the goods are not in a deliverable state at the time of the
contract and so property does not pass under rule 1, but they are later put into a deliverable
state. Once the seller has undertaken the work necessary to render the goods deliverable,
property will pass when the buyer has been given such notice as the contract specifies or,
failing that, such notice as a reasonable person would require. The rule does not cover the
situation where the contract requires the buyer to put the goods into a deliverable state and
so in that situation property may pass, unless there is a contrary intention in the agreement.
4.4.4 Section 18, rule 3: price to be ascertained

If the seller of specific goods in a deliverable state is required to carry out some procedure
to ascertain the price, such as weighing or measuring, property will not pass until that
has been done and the buyer notified. If the contract stipulates that someone other than
the seller is to undertake this task, rule 3 will not apply and property will pass under rule 1
(Nanka-Bruce v Commonwealth Trust [1926] AC 77; Sealy and Hooley, p.310).
4.4.5 Section 18, rule 4: sale or return

Where goods are ‘delivered to the buyer on approval or sale or return’, property passes
when the buyer:
 signifies acceptance, or
 does an act adopting the transaction (rule 4(a)), or
 retains the goods beyond the time fixed by the agreement for a decision without ‘giving no-
tice of rejection’, or, if no time is fixed, retains the goods beyond a reasonable time (rule 4(b)).
This rule covers situations where goods are supplied on the understanding that the
sale is dependent on the person in receipt of the goods adopting the transaction. Such
agreements might be entered into because of a retailer’s uncertainty about demand for
a product, which, in turn, may affect the ability to pay and, hence, the element of credit
(Atari Corporation (UK) Ltd v Electronics Boutique Stores (UK) Ltd [1998] QB 539. Contrast with
reservation of title clauses, discussed at 6.3 below).
Strictly, there is no contract of sale or agreement to sell, but only an offer by the ‘seller’,
which the ‘buyer’ may accept or reject. Phillips LJ remarked that ‘the notice of rejection re-
ferred to by the Act of 1979 is no more than the notice that an offeree can always give that a
contractual offer is rejected.’ (Atari Corporation v Electronics Boutique Stores [1998] QB 539)
What are the obligations of the ‘buyer’ and the ‘seller’ up to the point at which the sale is
concluded? According to Phillips LJ:
 The ‘buyer’ holds the goods under a contract of bailment. This means that the risk of dam-
age to the goods remains with the ‘seller’, although the ‘buyer’ must take reasonable care
of them.
 The ‘seller’ may not withdraw the offer to sell.
The sale or return must be distinguished from a contract of sale in which the buyer
acquires property and risk in the goods but there is a term allowing their return (Elphick v
Barnes [1880] 5 CPD 321).
Other issues that have caused difficulty in sale or return agreements have been: (i) what
is meant by ‘an act adopting the transaction’; (ii) what amounts to a reasonable time; (iii)
what constitutes a notice of rejection and what effect does it have?
i What constitutes ‘an act adopting the transaction’? If an act indicates personal use by the
‘buyer’, which goes beyond what is contemplated by the arrangement, this might amount
to ‘an act adopting the transaction’ (Poole v Smith’s Car Sales (Balham) Ltd [1962]
1 WLR 744; Sealy and Hooley, pp.314–15. Also, Kirkham v Attenborough [1897] 1 QB 201).
ii What amounts to a reasonable time? This depends on the agreement and the nature
of the goods (Poole v Smith’s Car Sales (Balham) Ltd [1962] 1 WLR 744; Sealy and Hooley,
pp.314–15).
iii What constitutes a notice of rejection and what effect does it have? Often contracts for
sale or return do not address the issues of how the ‘buyer’ is to signify rejection of the
goods, or what is the responsibility of the ‘buyer’ once the goods have been rejected.
Subject to any agreement to the contrary, rejection can be notified in any form. Such
notice is only effective if given before property has passed, that is, before acceptance
– after acceptance the buyer will have the normal remedies that any buyer under a sale
contract would have if the goods are defective. Subject to any agreement to the contrary, if
the ‘buyer’ wishes to reject the goods, a notice of rejection will be sufficient without return
of the goods. The ‘buyer’ must make the goods available to the ‘seller’ within a reasonable
period of time after rejection.
Activity 4.6
a Jake has expressed an interest in buying for £1000 a particular horse owned by Mary, if it
is suitable for his young daughter to ride. Mary agrees that Jake can take the horse for 10
days in order to determine its suitability. After a week the horse becomes ill and dies. Is
Jake liable for the price?
b How might your answer to (a) have differed if Jake had used the horse himself on a
number of occasions and had ridden it in a race?
4.4.6 Section 18, rule 5: unascertained goods and appropriation

While rules 1 to 4 are concerned with specific goods, rule 5 concerns unascertained goods.
No matter what the parties may wish property does not pass ‘until the goods are ascer-
tained’ (s.16, but see s.20A in 4.4.8 below). Once the goods are ascertained property passes
when the parties intend (s.17). If no such intention can be determined, rule 5 applies.
Property in the goods passes to the buyer where (rule 5(1)):

 there is a contract for the sale of unascertained goods or future goods by description, and
 goods of that description and in a deliverable state are unconditionally appropriated to the
contract, either by the seller with the assent of the buyer or by the buyer with the assent of
the seller (assent may be given before or after the appropriation).
The chief difficulty lies in the means by which goods are unconditionally appropriated.
Appropriation requires (Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd’s Rep
240):
 an irrevocable identification of the goods that are the subject of the contract (Sealy and
Hooley, pp.317–24)
 the assent of both parties.
The contract can specify what amounts to appropriation, but often the identification and
assent will be by the seller physically taking the goods to the buyer and the buyer accept-
ing them, or the buyer going to the seller who hands over the goods.
It is not sufficient for the seller merely to label goods or to store them separately (unless
this is specified in the contract) since this leaves the possibility of the seller changing their
mind and substituting other goods. The seller must unconditionally appropriate the goods
to the contract. This action is, usually, the last act of the seller, that is, delivery of the goods.
This does not necessarily make matters straightforward because under the SGA the seller’s
act of delivery is presumed to be merely making goods available for collection by the buyer
(see section 5.2.2).
There are some troublesome cases. In Aldridge v Johnson [1857] 7 E & B 885, there was
appropriation before delivery when the seller placed the goods in containers supplied by
the buyer, even though the seller could have unpacked the goods and replaced them with
other goods. Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd’s Rep 240, is
more rigorous. There was no appropriation even though the seller packed the bicycles in
crates marked with the buyer’s name. The only substantial distinction between this case
and Aldridge is that in the latter the containers were supplied by the buyer, but that would
not seem to go to the core of the matter, which should be that there is no appropriation
until it is beyond the power of the seller to substitute goods.
Handing goods to a carrier for transmission to the buyer, without reserving the right of dis-
posal, may amount to unconditional appropriation by the seller (rule 5(2); Wardar’s (Import
& Export) Co Ltd v W Norwood & Sons Ltd [1968] 2 QB 663; Sealy and Hooley, pp.322–24). Such
an action is also presumed to constitute delivery (s.32(1); see section 5.2.2).
If the seller attaches conditions to the appropriation, property will not pass even though
the goods are ascertained: for example, if the contract stipulates that the seller retains
property in the goods until the buyer has paid, property will only pass when the condition
has been met (see s.19 and also 6.3).
Appropriation is only complete if the buyer signifies assent by, for instance, agreeing to
take delivery of the goods. Unless the parties agree otherwise, the assent of the buyer does
not have to take a particular form and can be implied. Where goods of the correct quality
and description are appropriated by the seller to the knowledge of the buyer, the buyer
cannot delay the passing of property by inaction (Pignataro v Gilroy [1919] 1 KB 459; Sealy
and Hooley, p.320).
Activity 4.7
Acme agrees to sell to Ecma 100 tons of wheat to be delivered on 31 August. On 31 August,
Acme notifies Ecma that 100 tons of wheat have been set aside in Acme’s warehouse and
urges them to collect the wheat. The wheat is stolen from the warehouse on 10 September.
Advise Acme.
4.4.7 Section 18, rules 5(3) and 5(4): ascertainment by exhaustion

Mustill J pointed out that ascertainment can be achieved by a method other than that in rule
5(1) (Karlshamns Oljefabriker v Eastport Navigation Corp: The Elafi [1981] 2 Lloyd’s Rep 679; Wait
& James v Midland Bank [1926] 31 Com Cas 172; Sealy and Hooley, pp.300–301). All that is neces-
sary is that the goods should be ascertained and the parties intend property to pass. Where
there is a sale of part of a ship’s cargo, the goods can be ascertained where the cargo is
reduced by prior deliveries to the amount for which the buyer contracted, or where a single
buyer purchases the whole cargo in different lots, and the parties intend property to pass.
A agrees to buy 100 tons, which is part of a cargo of 1,000 tons on board MV Challenger. The
rest of the cargo is bought by other purchasers. The ship delivers 900 tons to those other
buyers. At that point A acquires property in the remaining 100 tons (assuming there is no
contrary intention expressed in the sale contract).
Mustill J’s idea of ascertainment by exhaustion has been confirmed by rules 5(3) and 5(4),
which were added to s.18 in 1995. Under rule 5(3):
Where there is a contract for the sale of a specified quantity of unascertained goods in
a deliverable state forming part of a bulk which is identified either in the contract or by
subsequent agreement between the parties and the bulk is reduced to (or to less than)
that quantity, then, if the buyer under that contract is the only buyer to whom goods are
then due out of the bulk:
a the remaining goods shall be taken as appropriated to that contract at the time when
the bulk is so reduced, and
b the property in those goods then passes to the buyer.
Rule 5(4) states that:

Paragraph (3) above applies also (with the necessary modifications) where a bulk is
reduced to (or less than) the aggregate of the quantities due to a single buyer under sepa-
rate contracts relating to that bulk and he is the only buyer to whom goods are then due
out of that bulk.
4.4.8 Section 20A: unidentified part of identified bulk

Rule 5(3) does not deal with the situation where the buyer has bought an unidentified part
of a specified bulk and the rest of the bulk remains intact: for example, 500 tons of wheat
from a cargo of 1,000 tons on board the MV Challenger (Re Wait [1927] 1 Ch 606). The goods
are unascertained and property cannot pass (s.16). A buyer, who has paid for the goods, will
merely rank among the unsecured creditors if the seller becomes insolvent. On the other
hand, the buyer is not at risk if the goods are lost (although see section 4.5 below). It makes
no difference if two buyers together bought the entire 1,000 tons, although it is possible
to create a tenancy in common. In Re Stapylton Fletcher Ltd [1995] 1 WLR 1181, wine was sold
to customers and, although held by the seller, it was kept separately from the seller’s own
wine. It was not possible to identify which customer owned which wine, but it was held
that the customers were tenants in common: the wine was ascertained by the transfer
from the merchant’s own stock to storage for the customers.
The Law Commission was asked to look into these issues. Its report led to ss.20A, 20B, which
created a new species of property interest. The buyer, who has paid, can acquire co-owner-
ship of the bulk with any other buyers, who have paid.
The buyer will be an owner in common of the bulk (unless the parties agree otherwise
– s.20A(2)) if all the following circumstances are present:
i There is a sale of ‘a specified quantity of unascertained goods’ that form part of a bulk. A
specified quantity is ‘500 tons of wheat’ and not ‘half the cargo of wheat’. In the latter case
the buyer does not come within s.20A, but might be a tenant in common at common law.
ii The bulk is identified in the contract or by subsequent agreement (s.20A(1)(a)). The bulk is
‘a mass or collection of goods of the same kind which (a) is contained in a defined space or
area; and (b) is such that any goods in the bulk are interchangeable with any other goods
therein of the same number or quantity’ (s.61(1)). Examples given by the Law Commission
of a bulk included wheat on a named ship, oil in a specified tank, or a specified roll of carpet
from which a particular length is to be cut.
iii The buyer has paid all or part of the price (s.20A(6)).
Note that s.16 still applies to those goods for which the buyer has not paid so that property
in them cannot pass until they become ascertained.
The size of the buyer’s share of the bulk depends on the ratio that the quantity of goods
paid for and due to the buyer bears to the bulk (s.20A(3)). This means that if the buyer has
agreed to buy 100 litres of oil from a specified tank containing 1,000 litres and has paid, the
buyer becomes a co-owner of the bulk in the ratio of 100:900. If a second buyer pays for
100 litres and a third buyer pays for 800 litres the co-ownership ratio is 100 (first buyer):
100 (second buyer): 800 (third buyer). The three parties are co-owners of the entire bulk
and not owners of a particular part of the bulk.
Where the bulk has diminished through, for example, natural wastage, or where the seller
has sold more goods than are in the bulk, the total shares will exceed the size of the bulk.
Here each co-owner will have the same interest in the reduced bulk (s.20A(4)). Taking our
oil tank, if half of the bulk has been lost, the ratio will be 50:50:400. Goode (2004, p.227)
suggests that where part of the bulk is not sold any diminution of the bulk should be borne
first by the seller: for example, if the seller had made only one sale of 100 litres (for which
the buyer paid) and the bulk is diminished to 980 litres, the loss should be entirely borne
by the seller, so that the buyer’s interest in the bulk would be 100:880.
Under s.20B(1), all the co-owners are deemed to consent to any delivery from the bulk to
another co-owner. A co-owner, who receives no more than is due to that person under the
contract, is not liable to any other co-owner for taking delivery and is not liable to com-
pensate where there is a shortfall in the delivery to another co-owner (s.20B(2), (3)). If the
seller has oversold and delivery of the entire bulk has been made to the other co-owners, a
disappointed co-owner will only have a remedy against the seller.
Reflection point
Think about the difficulties explained in the paragraph above. Can you suggest any ways in
which the rules might be improved? Record your thoughts in your Skills portfolio.
If part of the price has been paid by the buyer, any part delivery to the buyer is ‘ascribed in
the first place to the goods in respect of which payment has been made’ (s.20A(5)). If the
buyer of 2000 litres from a bulk of 10,000 litres has paid half the price and subsequently
500 litres are delivered, that buyer’s interest in the remaining bulk is calculated as follows:
the 500 litres delivered are ascribed to the payment so the buyer’s interest in the bulk is
now 500:9500. This maintains the principle that the buyer’s interest under s.20A is related
to the payment made.
Finally, under s.20B(1), all the co-owners are deemed to consent to any disposition of the
goods by a co-owner and a sale by the co-owner is a contract of sale of goods because
‘goods’ includes an undivided share in goods (s.61(1)), which is what a co-owner has under
s.20B. This provision allows buyers to deal in goods while they are in transit.
Summary
Where the goods are specific property will pass when the parties intend it to be trans-
ferred. If no intention is evident, the Act sets out the rules in s.18 for determining when
property will pass. If the contract is for the sale of unascertained goods, no property in the
goods is transferred to the buyer until the goods are ascertained (s.16). However, the par-
ties may be tenants in common at common law or co-owners under s.20A.
Activity 4.8
a Fred agrees to buy ‘all the hay’ in Jane’s barn at £100 per ton. Fred agrees to take the hay
to a neighbouring farm where it can be weighed. Has property passed to Fred?
b Mary agrees to buy 100 bags of hay from John. The price is fixed at £1,000 on the under-
standing that the bags contain in total 10 tons of hay. Mary later weighs the bags and
discovers that they contain 9 tons. Has the property in the hay passed to Mary?
c Jake goes into Mary’s furniture shop. He agrees to buy a set of kitchen units, which will
be delivered on Monday. It is also agreed that workers employed by Mary will construct
and fit the units on Tuesday. The units are delivered and placed in Jake’s garage, which
he locks. Someone breaks into the garage and steals the units on Monday night. Mary
refuses to replace the units and demands payment from Jake. Did property pass to Jake
before the theft?
d Would Re Goldcorp Exchange Ltd be decidedly differently in the light of s.20A?

4.5 Risk
Essential reading
¢ Sealy and Hooley, Chapter 2: ‘Basic concepts of personal property’, pp.77–82.
Which party bears the consequences of loss or damage to the goods? The general rule is
that risk follows property: the owner of the goods bears any loss. Under s.20(1), the goods
remain at the seller’s risk until property is transferred to the buyer. This rule applies irre-
spective of which party has possession of the goods. (In passing we may note that the Sale
and Supply of Goods to Consumers Regulations 2002, regulation 4, introduced s.20(4) to
the Act, which provides that where someone buys as a consumer the goods remain at the
seller’s risk until delivery.)
The general rule will not apply where:

 The parties have agreed that risk should pass (for example, Head v Tattersall (1871) LR 7 Exch
7; Sealy and Hooley, p.278). The parties may agree that risk will pass even though the goods
are unascertained (Sterns Ltd v Vickers Ltd [1923] 1 KB 78; Sealy and Hooley, pp.280–81).
 The loss was caused by the fault of one party, in which case that party bears the loss
(s.20(2); Demby Hamilton & Co Ltd v Barden [1949] 1 All ER 435, Sealy and Hooley, pp.279–80).
 One party is the bailee of the goods and the loss occurs through their lack of reasonable
care, in which case that party will be liable (s.20(3); Wiehe v Dennis Bros [1913] 29 TLR 250).
 The seller is required by the contract to send goods to the buyer, in which case delivery to a
carrier is presumed to constitute delivery to the buyer, who, therefore, bears the risk of loss
in transit (s.32. See also s.33).
Reflection point
Is this arrangement fair? Could the rules be improved?
Where risk has passed before the buyer acquires the property in the goods or possession
of them, and the goods are damaged through the negligence of the carrier, the buyer will
not be able to sue the carrier (The Aliakmon [1986] AC 785). This rule has been effectively
reversed where goods are carried by sea (Carriage of Goods by Sea Act 1992), but remains in
other forms of transit.
Activity 4.9
a What risks do the seller and buyer run and which risks are dealt with under s.20(1) of the
Act?
b Acme contracts to buy 1,000 tons of wheat from a bulk of 10,000 tons held by Ecma
in its warehouse and has paid. The warehouse burns down before any of the wheat is
delivered. Who bears the loss?
4.6 Perishing of goods and frustration of contract
Essential reading
¢ Sealy and Hooley, Chapter 8: ‘Passing of the property in the goods as between seller and
buyer’, pp.282–93.
4.6.1 Specific goods perishing

Where there is a contract for the sale of specific goods, but the goods perished before
the contract without the knowledge of the seller, the contract is void (s.6). Section 6 may
apply even if only part of the goods has perished (Barrow, Lane & Ballard Ltd v Phillip Phillips
& Co [1929] 1 KB 574; Sealy and Hooley, p.285). Under the contract one party (the seller or
the buyer) may have agreed to take the risk that the goods do not exist at the time of the
contract; in which case that party will be liable should the risk arise.
Section 6 might seem to resemble the doctrine of common mistake in the general law of
contract, but goods that have never existed cannot be said to have perished (as to whether
s.6 reproduces the decision in Courturier v Hastie [1856] 5 HL Cas 673, see Sealy and Hooley,
p.283–84).
The goods will have perished where they exist but have lost their commercial character: for
example, dates perished where underwater for 2 days and impregnated with sewage (Asfar
v Blundell [1896] 1 QB 123. The problem with this case is that it was not a decision under the
Sale of Goods Act and there is a contrary – if rather dubious – authority, Horn v Minister of
Food [1948] 2 All ER 1036).
Under s.7, where there is an agreement to sell specific goods and, without any fault on the
part of either party, the goods perish subsequent to the agreement and before the risk has
passed to the buyer, the agreement is avoided. Note that this section does not apply where
there is a contract of sale (for the difference between an agreement to sell and a contract
of sale, see 4.2 above).
4.6.2 Unascertained goods perishing

Sections 6–7 do not apply to contracts for the sale of unascertained goods. If unascertained
goods are sold by description (for example, ‘500 tons of wheat’), the seller is obliged to de-
liver. The seller cannot seek to excuse non-delivery by showing that goods of that descrip-
tion were not available at the time of delivery. The seller takes the risk of this eventuality
and must pay damages in the event of their being unable to deliver (Blackburn Bobbin Co Ltd
v TW Allen & Sons Ltd [1918] 2 KB 467; Sealy and Hooley, p.287).
The parties may, however, include a term (a force majeure clause) to excuse failure to
deliver that is the result of certain events, such as war. Moreover, they may agree that
the contract is to sell goods drawn from an identified source, such as from the cargo on a
named ship. Where there was a contract of sale for ‘200 tons of regent potatoes grown on
land belonging to [the farmer] in Whaplode’, and, through no fault of the farmer, disease
prevented the land from producing more than 80 tons, it was held that there was no
breach. ‘It was not an absolute contract of delivery under all circumstances, but a contract
to deliver so many potatoes, of a particular kind, grown on a specific place, if deliver-
able from that place.’ (Howell v Coupland [1876] 1 QBD 258; Sealy and Hooley, p.289, Lord
Coleridge CJ.) Note that, although the court held that this was a contract for specific goods,
they were not identified and agreed on at the time of the contract and so are not specific
goods under the subsequent Sale of Goods Act. If they are not specific goods, ss.6–7 do not
apply and we must fall back on the common law. In other words, this decision might be
treated as outside the framework of the Act and, therefore, as a rule of common law that
has survived under s.62(2). (For an explanation of this decision, see HR & S Sainsbury Ltd v
Street [1972] 1 WLR 834; Sealy and Hooley, pp.290–92.)
There is an obvious difficulty with treating as different those goods that are drawn from an
identified source (sometimes called quasi-specific goods). To some degree all contracts for
unascertained goods involve an identified source: the sale of ‘a Bentley motor car’ restricts
the pool of goods from which the appropriation can be made; the sale of a certain number
of lengths of ‘Norwegian timber’ identifies the only eligible source so that Swedish timber
will not meet the obligation under the contract. It can, therefore, be said that all unascer-
tained goods are drawn from an identified and limited source.
4.6.3 Frustration
Aside from those situations already dealt with in which the goods are lost, the doctrine
of frustration arises in sale contracts in the same way as in other types of contract: for
example, through supervening illegality or impossibility caused by an unforeseen event.
But it should be remembered that the courts are reluctant to invoke this doctrine and, in
particular, have shown a disinclination to do so in sale contracts involving unascertained
goods. Moreover, the doctrine of frustration will not apply where one party has agreed to
run the risk of a particular loss or is responsible for that loss occurring.
Activity 4.10
Why is it more useful to resolve cases like Howell v Coupland by the use of an implied term
than to use the doctrine of frustration?
Summary
The general rule is that risk of loss passes with property, but the parties may agree
otherwise. Where there is a contract for the sale of specific goods and the goods perished
before the contract without the knowledge of the seller, the contract is void. Where there
is an agreement to sell specific goods and, without any fault on the part of either party, the
goods perish subsequent to the agreement and before the risk has passed to the buyer, the
agreement is avoided. In a contract for the sale of unascertained goods, the seller will not
be excused from performance, unless the contract requires the goods to be drawn from a
specified source when the courts may imply a term removing or modifying the obligation
to perform in the event that this source is not available.
4.7 Transfer of title
4.7.1 The nemo dat rule
Essential reading
¢ Sealy and Hooley, Chapter 9: ‘Transfer of title’, pp.328–31.
Here we are concerned with situations in which someone, who has either no property or
their rights are defective, disposes of the goods in circumstances that enable the buyer to
acquire rights to the exclusion of the true owner.
A thief sells a stolen car to an innocent purchaser, a rogue deceives the owner of goods into
parting with them and then sells them to an innocent buyer, or a person misguidedly sells
to an innocent buyer a car that is the subject of a hire purchase contract and is, therefore,
the property of the finance company. In each of these cases the question is, who has title to
the goods?
At the outset it must be emphasised that the general rule is: ‘where the goods are sold by a
person who is not their owner, and who does not sell them under the authority or with the
consent of the owner, the buyer acquires no better title to the goods than the seller had’
(s.21(1)). This is known as the nemo dat quod non habet† rule (or simply nemo dat). The owner †
Nemo dat quod non habet (Latin):
can bring an action under the Torts (Interference with Goods) Act 1977 against anyone who ‘No-one (can) give what he or she
has wrongful possession of the goods. has not got.’
Nevertheless there are exceptions to this general rule. Denning LJ explained:

In the development of our law, two principles have striven for mastery. The first is for
the protection of property: no one can give a better title than he himself possesses. The
second is for the protection of commercial transactions: the person who takes in good
faith and for value without notice should get a good title. (Bishopsgate Motor Finance
Corporation Ltd v Transport Brakes Ltd [1949] 1 KB 322; Sealy and Hooley, pp.330–31.)
While the first principle (nemo dat) can be overridden by the second, the courts have, for
the most part, clung to its fundamental importance. Lord Goff, after referring to the nemo
dat rule in s.21(1), pointed out, ‘The succeeding sections enact what appear to be minor
exceptions to that fundamental principle’ (National Employers’ Mutual General Insurance
Assocn Ltd v Jones [1990] 1 AC 24). Remembering this, we turn to consider the nature of the
exceptions.
4.7.2 Estoppel
Essential reading
The first exception to the nemo dat rule is contained in s.21(1) itself. The part of that section
quoted above (section 4.7.1) is immediately followed by the words ‘unless the owner of
the goods is by his conduct precluded from denying the seller’s authority to sell’. Where
the true owner of the goods represents to the buyer that the person selling is acting as
an agent with authority to sell or is the owner, the owner may be estopped from denying
that authority to sell and the buyer acquires good title (Henderson & Co v Williams [1895] 1
QB 521; Sealy and Hooley, pp.334–35). A car owner, who wished to raise money on his car
without selling it, was estopped when he colluded in a transaction with a car dealer under
which the car was represented to a finance company as belonging to the dealer (Eastern
Distributors Ltd v Goldring [1957] 2 QB 600; Sealy and Hooley, pp.332–34).
Merely handing possession of goods to another is usually not sufficient for this estoppel
to arise because it will not amount to a representation. Carelessness in handing over pos-
session of goods or documents of title is not enough because, ‘a man who owns property
is not under any general duty to safeguard it and… he may sue for its recovery any person
into whose hands it has come’ (Moorgate Mercantile Co Ltd v Twitchings [1977] AC 890, Lord
Wilberforce; Central Newbury Car Auctions Ltd v Unity Finance Ltd [1957] 1 QB 371; Sealy and
It may be otherwise if it can be shown that the owner has breached a duty of reasonable
care owed to the third party and that this induced the third party to buy the goods so
that the negligence was the proximate cause of the buyer’s loss. In Mercantile Credit Co Ltd
v Hamblin [1965] 2 QB 242 (Sealy and Hooley, pp.339–40), the owner of a car signed forms
in blank, without reading them, in the belief that they would enable a car dealer, who
appeared to be respectable, to raise money on the security of the car. In fact, the dealer
fraudulently used the forms to sell the car to a finance company. The Court of Appeal held
that a duty of care existed between the owner and the finance company, but that there
was no breach of that duty because she knew the dealer and reasonably believed him to be
respectable, so that it was not negligent for her to sign the forms in blank. Moreover, two
of the judges thought that, even if there had been negligence, it was not the negligence of
the owner but the fraud of the dealer which caused the loss. On the other hand, by analogy
with a case on the sale of land (Spiro v Lintern [1973] 1 WLR 1002), unreasonable behaviour
by the owner in failing to correct a misrepresentation that the owner knows has been
made to the seller could create an estoppel, if the seller acts on the basis of the misrepre-
sentation and suffers loss as a consequence.
In Shaw v Metropolitan Police Commissioner [1987] 1 WLR 1332, the Court of Appeal took a
rather narrow view of the use in s.21(1) of the word ‘sold’ as meaning that the estoppel
principle did not apply where there was only an agreement to sell.
Activity 4.11
Why were Farquharson Bros not estopped from denying the title of the third party in
Farquharson Bros & Co v C King & Co [1902] AC 325 (Sealy and Hooley, pp.335–36)?
4.7.3 Sale under a voidable title
Essential reading
By s.23, the buyer, who buys in good faith and without notice of any defect in the title of the
seller, will acquire good title if the goods are bought from a seller whose title is voidable
but, at the time of the sale, it has not been avoided (Cundy v Lindsay [1878] 3 App Cas 459;
Sealy and Hooley, pp.328–29).
There are many illustrations of a voidable contract familiar to students of the law of con-
tract. To take one example, in Kings Norton Metal Co Ltd v Edridge, Merrett & Co Ltd [1897] 14
TLR 98, a manufacturer of metal received an order from ‘Hallam & Co’ and in consequence
sent goods. It turned out that ‘Hallam & Co’ did not exist. The rogue resold the goods. It was
held that the intention had been to contract with the writer of the order, and, although
this intention had been induced by a fraudulent misrepresentation, that only made the
contract voidable. Since it had not been avoided before the goods were resold to a third
party, title passed to the latter.
The first issue is whether property has passed from A (the original seller) to B (the rogue,
who later sells the goods to C, the innocent buyer). If it has not s.23 will not operate.
Where property has passed to B, A is likely to face some difficulty in avoiding the contract
before title passes to a third party. This can be done by notifying B, but where B is a rogue
this may not be possible. In Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525 (Sealy
and Hooley, pp.354–55), it was held that if the rogue renders it impossible to make contact,
the true owner need merely take such steps as the reasonable owner would take to recover
the goods. Caldwell, a car owner who had been the victim of fraud, informed the police and
the Automobile Association. After doing these things, the car was sold by the rogue to a car
dealer. The dealer had had previous dealings with the rogue, which ought to have enabled
them to infer that this transaction was fraudulent. The dealer then sold the car to a finance
company, who bought in good faith and without notice. The Court of Appeal concluded
that the dealer was not an agent of the finance company so that the latter did not have the
dealer’s knowledge, but that Caldwell had done sufficient to avoid the contract by inform-
ing the police before the sale to the dealer.
The value of this decision has been restricted by Newtons of Wembley Ltd v Williams [1965]
1 QB 560 (Sealy and Hooley, pp.362–63. Two of the judges who sat in Caldwell also heard
this appeal), where it was held that, even if the owner avoided the contract before the
resale, title passed because the rogue was a buyer in possession and the sale was made in
the ordinary course of business of a mercantile agent, that is, at a market for used cars (see
s.25(1); section 4.7.5 below).
4.7.4 Seller in possession
Essential reading
This is where A, the seller, having sold the goods to B, then sells the same goods to C.
If property has passed to B, but the seller is still in possession of the goods or documents of
title to the goods, and the seller sells them to C, who purchases in good faith and without no-
tice of the sale to B, this second transaction passes title to C. B has only an action for breach
of contract against the seller (s.24. Section 8 of the Factors Act 1889 is almost identical).
Possession includes where goods are not in the physical possession of the seller, but are
under their control: for example, goods held by a warehouse owner to the order of the
seller. The seller’s possession does not have to be in any particular capacity or even lawful:
‘It is sufficient if he remains continuously in possession of the goods that he has sold to
the purchaser’ (Worcester Works Finance Ltd v Cooden Engineering Co Ltd [1972] 1 QB 210,
Lord Denning MR). Lord Denning thought the section might not apply where the seller’s
possession had not been continuous (also, Pacific Motor Auctions Pty Ltd v Motor Credits (Hire
Finance) Ltd [1965] AC 867; Sealy and Hooley, pp.356–58. But Bridge (1998), pp.457–59).
For the second buyer to acquire good title, the seller must deliver possession of the goods
or documents of title: merely contracting a second sale is not sufficient to give title to the
second buyer. In Michael Gerson (Leasing) Ltd v Wilkinson [2001] QB 514, machinery was sold
to a finance company and leased back to the seller, who then sold it to a second finance
company and leased back; at all times the machinery remained in the possession of the
seller, but it was held that the seller’s acknowledgement to the finance company that the
machines were being held on its behalf amounted to a delivery.
By ‘documents of title’ is meant those documents ‘used in the ordinary course of business
as proof of the possession or control of goods, or authorising or purporting to authorise,
either by indorsement or delivery, the possessor of the document to transfer or receive
goods’ (s.61(1), see also Factors Act 1889, s.1(4). See Sealy and Hooley, pp.358–59).
Note SGA gives the seller the right to resell goods and pass property to the new buyer where
the seller retained possession and the price has not been paid by the original buyer (see 6.2).
4.7.5 Buyer in possession
Essential reading
In this situation it is the buyer who has acquired possession of the goods and sells to a
second buyer.
Where a person having bought or agreed to buy goods obtains, with the consent of the
seller, possession of the goods or the documents of title to the goods, the delivery or
transfer by that person, or by a mercantile agent acting for him, of the goods or docu-
ments of title, under any sale, pledge, or other disposition thereof, to any person receiving
the same in good faith and without notice of any lien or other right of the original seller in
respect of the goods, has the same effect as if the person making the delivery or transfer
were a mercantile agent in possession of the goods or documents of title with the consent
of the owner. (s.25(1))
Section 9 of the Factors Act 1889 is similar (but see DF Mount Ltd v Jay & Jay (Provisions) Co Ltd
[1960] 1 QB 159; Sealy and Hooley, pp.365–67).
The goods or documents of title (4.7.4 above) must have been obtained under a sale or
agreement to sell (‘bought or agreed to buy’), so a void contract is insufficient, as is acquisi-
tion as a bailee or under a hire-purchase contract or under a sale or return agreement (s.18,
rule 4). The provision that the transaction will have ‘the same effect as if the person making
the delivery…were a mercantile agent’ means that the buyer in possession is placed in the
position of a mercantile agent and the second buyer must show that the sale was in the
ordinary course of business of a mercantile agent (Newtons of Wembley Ltd v Williams [1965]
1 QB 560; Sealy and Hooley, pp.361–63. On mercantile agents see section 2.2.2 above).
The words ‘with the consent of the owner’ at the end of s.25(1) prevent the nonsense of
a thief starting the whole chain of events and still passing good title. There can only be
a buyer in possession where possession of the goods or documents of title has been ob-
tained with the consent of the owner (National Employers’ Mutual General Insurance Assocn
Ltd v Jones [1990] 1 AC 24; Sealy and Hooley, pp.363–64). Yet, it matters not how that consent
was obtained – fraud is enough even though this may amount to theft (Pearson v Rose &
Young Ltd [1951] 1 KB 275; Sealy and Hooley, p.346).
On the meaning of ‘disposition’ in s.25(1), see P4 Ltd v Unite Integrated Solutions plc [2006]
EWHC 2640 (TCC).
4.7.6 Sale under the Factors Act 1889, s.2
Essential reading
Merely being in possession of goods or documents of title does not, in itself, amount to a
representation that the possessor has authority to sell those goods and to pass good title
(see 4.7.2 above). However, where the person in possession is a factor (now normally called
a mercantile agent), the buyer may acquire good title. A mercantile agent is an agent who
is entrusted with the possession of goods or documents of title to goods and who is al-
lowed to dispose of them, either in the agent’s own name or as a principal (see 2.2.2 above).
Under Factors Act 1889, s.2(1), a sale, pledge, or other disposition shall be as valid as if
expressly authorised by the owner of the goods where all the following are present:
 The disposition is by a mercantile agent (Jerome v Bentley [1952] 2 All ER 114; Sealy and
Hooley, p.330).
 The mercantile agent is in possession of goods or of the documents of title to goods with
the consent of the owner (see s.2(2), (3)). The owner must have specifically consented
to the person having possession in their capacity as mercantile agent and not in some
other capacity (for example, handing over goods for repair). Consent is given even though
obtained by deception (Folkes v King [1923] 1 KB 282; Sealy and Hooley, p.349). It might
plausibly be suggested that such consent is not consent at all, but the courts have tended
to protect the innocent third party in such situations (but Pearson v Rose & Young Ltd [1951]
1 KB 275). Once consent has been given it continues, in spite of the owner terminating such
consent, unless the person dealing with the agent has notice of that termination (s.2(2)).
The problem for the buyer is to know in what capacity the agent received possession of the
goods. As in this whole area of nemo dat, we are confronted with Denning LJ’s competing
principles of public policy outlined in Bishopsgate Motor Finance Corporation (4.7.1 above).
 The disposition is made when acting in the ordinary course of business of a mercantile agent.
 The person taking under the disposition must have acted in good faith and that at the time
of disposition must not have had notice of the mercantile agent’s lack of authority (Heap v
Motorists’ Advisory Agency Ltd [1923] 1 KB 577; Sealy and Hooley, pp.351–52).
Activity 4.12
Why did the buyer in Pearson v Rose & Young Ltd [1951] 1 KB 275 not acquire good title to the car?
Note: you will need to read the case to answer the question.
4.7.7 Motor vehicles let under hire purchase
Essential reading
Part III of this act (substantially re-enacted by the Consumer Credit Act 1974, schedule 4)
means that a private purchaser obtains title where they acquire a motor vehicle for value
and without notice from someone who is in possession under a hire-purchase or condi-
tional sale agreement.
4.7.8 Powers of sale and resale
Essential reading
¢ Sealy and Hooley, Chapter 9: ‘Transfer of title’, pp.352 and 368.
Section 21(2)(b) provides that nothing in the Act affects ‘the validity of any contract of sale
under any special common law or statutory power of sale or under the order of a court of
competent jurisdiction.’ This retains powers of sale granted to pledgees, bailees, innkeep-
ers, pawnbrokers, liquidators and others, which enable them to pass title to the buyer.
See Chapter 6 section 6.2.6, which discusses the seller’s rights of resale where the buyer has
failed to pay.
Activity 4.13
What general principle applies where someone acquires goods from a person who is not
their owner?
Useful further reading

¢ Bridge, M. Personal property law. (Oxford: Oxford University Press, 2002), pp.115–36.
Summary
The general rule is that a buyer cannot acquire a better title than that of the seller. This rule
can be overridden in particular situations where someone, who takes in good faith and for
value without notice, will acquire good title and will, therefore, be able to resist the claims
of the original owner. It must be emphasised that these are narrow exceptions and that, on
the whole, the courts have had greater regard for the general rule.

 discuss the approach taken to interpretation of the Sale of Goods Act
 analyse the components of the definition of a contract of sale
 explain the circumstances in which property in goods is passed
 discuss and illustrate the exceptions to the nemo dat rule.

‘In the development of our law, two principles have striven for mastery. The first is for the
protection of property: no one can give a better title than he himself possesses. The second
is for the protection of commercial transactions: the person who takes in good faith and for
value without notice should get a good title.’ (Denning LJ)
Discuss. What do we mean by
‘discuss’? A discussion
Advice on answering the question between two friends is
Many students would tackle such a question by explaining the nemo dat rule in s.21(1) and different to the meaning
then listing the exceptions in the Act and the Factors Act. of the word in an exam
questions. Write down
While you would certainly get credit for this, it is important always to address the question your thoughts in your Skills
asked and here the question does not ask for a straightforward list. What is being sought is portfolio.
a discussion of Denning LJ’s view that there is a battle between these ‘two principles’. Thus,
better candidates will go beyond a mere list of the rule and its exceptions and consider
other matters. You need to show an understanding of the issues underlying this area of law.
What is the law seeking to achieve? Why do these rules exist in this form? Do they achieve
their objective(s)? It is by engaging in analysis that you will demonstrate the thorough
understanding of the law which will enable you to obtain higher marks.
You might tackle this question by looking at the following questions. What are the two
principles? Is Denning’s view of the relationship correct, or was Lord Goff closer to the
truth when he said that those sections in the Act that followed s.21(1) ‘appear to be minor
exceptions to that fundamental principle’ (National Employers’ Mutual General Insurance
Assocn Ltd v Jones [1990] 1 AC 24)? Do the exceptions undermine the nemo dat principle too
much? Is the nemo dat principle too rigid? Why has parliament (and the courts?) given
protection to (a) the owner and (b) the interests of innocent third parties? Has there been
a shift in favour of the latter and, if so, why has this happened (again see Denning LJ)? How
is the balance to be struck between the interests of the owner of the goods and those of
the innocent third party? What problems exist in this area and what reforms might be
suggested?
Reflect and review

Look through the points listed below:
Are you ready to move on to the next chapter?
Ready to move on = I am satisfied that I have sufficient understanding of the principles

outlined in this chapter to enable me to go on to the next chapter.
Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.
Need to study again = I found many or all of the principles outlined in this chapter very
difficult and need to go over them again before I move on.

I can discuss the approach taken to interpretation of

the Sale of Goods Act. ¢ ¢ ¢
I can analyse the components of the definition of a

contract of sale. ¢ ¢ ¢
I can explain the circumstances in which property in

goods is passed. ¢ ¢ ¢
I can identify how risk is passed. ¢ ¢ ¢
I can understand the nemo dat rule. ¢ ¢ ¢
I can discuss and illustrate the exceptions to nemo

dat rule. ¢ ¢ ¢
Must Revision
revise done
4.1 The Sale of Goods Act ¢ ¢
4.2 What is a contract of sale of goods? ¢ ¢
4.3 Components of the sale contract ¢ ¢
4.4 Passing of property ¢ ¢
4.5 Risk ¢ ¢
4.6 Perishing of goods and frustration of contract ¢ ¢
4.7 Transfer of title ¢ ¢

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Commercial law

Published by the University of London Press

4 Sale of goods: contract, property and risk . . . . . . . . . . . . . . . . . 55

5 Sale of goods: performance and implied terms . . . . . . . . . . . . . . 83

6 Sale of goods: acceptance, remedies and retention of title . . . . . . . 109

7 International sale contracts . . . . . . . . . . . . . . . . . . . . . . . 125

1.2 Learning outcomes for commercial law . . . . . . . . . . . . . . . . . . 9

1.3 Approaching your study . . . . . . . . . . . . . . . . . . . . . . . . . 10

1.4 The examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

 understand how to approach the examination.

1.1 Commercial law

1.2 Learning outcomes for commercial law

b Sale of goods Moving from knowledge to understanding

1.3 Approaching your study

1.3.1 Essential reading

Other texts to consult

 Goode, R. Commercial law. (London: Penguin Books, 2004) third edition

 Bradgate, R. Commercial law. (London: LexisNexis Butterworths, 2000) third edition

 Brown, I. Commercial law. (London: LexisNexis Butterworths, 2001)

1.3.2 Web sites

Cases and legislation:

Recent UK legislation is also available through a government site:

The skills required to become a graduate

1.3.3 Use your Portfolio/Learning Journal

1.4 The examination

1.4.2 On the day of the examination

1.4.3 Answering the question

Reminder of learning outcomes

2.1 What is an agency? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

2.2 Types of agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

2.3 Creation of agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

2.5 Actual authority of the agent . . . . . . . . . . . . . . . . . . . . . . . 26

2.6 Agency by estoppel and apparent authority . . . . . . . . . . . . . . . 28

2.7 Usual authority: Watteau v Fenwick . . . . . . . . . . . . . . . . . . . . 31

2.9 Agency of necessity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Learning outcomes How to succeed with the London package

2.1 What is an agency?

We will revisit all of these issues in this chapter.

Qualified consent theory

2.1.3 Trustees, sellers, buyers, distributors and franchisees

Distributorship and franchise It is commonplace to see a business advertising itself as

2.2 Types of agent

2.2.1 General agent and special agent

2.2.2 Factor and mercantile agent

2.2.3 Other agents

Activity 2.3 Practise speaking legal

The meaning of this term is discussed at 3.3.

2.3 Creation of agency

An agency may be created:

2.4.2 Power of attorney

2.5 Actual authority of the agent

2.5.1 Definition of actual authority

2.5.2 Express actual authority

2.5.3 Implied (or incidental) actual authority

2.6 Agency by estoppel and apparent authority

Apparent authority arises where: Reading cases For advice

 the agent did not purport to make the agreement as principal