transfer systems.1 Such terminology is unknown to English law, and even in Scots law ... Drobnig, The Interaction of Contract Law and Tort and Property Law in ...
MAASTRICHT Faculty of Law
Maastricht University
The Transfer of Moveables in Scotland and England Lars van Vliet
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Published in the Edinburgh Law Review, Vol 12, issue 2, May 2008, pp. 173-199 (available in HeinOnline, Academic Search Complete and Westlaw UK)
The Transfer of Moveables in Scotland and England Lars van Vliet* A. B. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
INTRODUCTION THE SALE OF GOODS ACT AND ENGLISH LAW Conceptual difficulties The development of the rules on transfer A causal system of transfer? Mistake cases Fraud cases Analysing third party protection Three abstract cases? Section 23 Illegal contracts Section 48 No ideal fit Tradition elements (a) Remedies of the unpaid seller (b) The buyer’s right to reject (c) Rejection and the seller’s right to cure (13) Abstract elements? (14) Postscript: the transfer of money C. THE POSITION IN SCOTLAND (1) Abstract or causal? (2) Two systems of transfer (3) How abstract is transfer at common law? D. CONCLUSION
A. INTRODUCTION In analysing the rules for the transfer of property, many continental legal systems make use of terms such as “consensual transfer system”, “traditio(n) system”, “causal” and “abstract” transfer systems.1 Such terminology is unknown to English law, and even in Scots law its use is relatively new. This paper analyses the transfer of tangible moveable property on sale in both English and Scots law. Its focus is on doctrine and technique rather than on legal policy.
*
Lecturer in Law, Maastricht University. I am grateful to Professor David Carey Miller, Lord Mance and Professor Kenneth Reid for their helpful comments on a draft of this paper. 1 L P W van Vliet, Transfer of Movables in German, French, English and Dutch Law (2000); C von Bar and U Drobnig, The Interaction of Contract Law and Tort and Property Law in Europe (2004); D L Carey Miller, “Passing of property: finding the fundamentals”, in S Espiau Espiau and A Vaquer Aloy (eds), Bases de un Derecho Contractual Europeo (2003) 471. 1
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The terminology requires explanation.2 A transfer system in which the contract itself passes property, without the need for delivery of possession, actual or constructive, is called a “consensual” transfer system, since consensus between the parties, their will to transfer and accept property, suffices to pass property. On the other hand, if delivery – traditio – is also needed, the system is known as a “tradition” transfer system. “Tradition” systems observe a distinction between the initial legal act which creates an obligation to transfer title (generally a contract) and the subsequent legal act – the “real agreement” as it is sometimes known – which effectuates the transfer. Cutting across this distinction between consensual and tradition systems is a second distinction between systems which are “causal” and those which are “abstract”. In an “abstract” system of transfer, the validity of the act of transfer is unaffected by any infirmity in the contract or other legal act on which it proceeded. The conveyance thus operates “abstractly” from the contract. In a “causal” system, however, the failure of the contract results in the failure of the conveyance, for the two are inextricably linked. A system in which property passes under the contract – a consensual system, in other words – is inevitably also causal in nature, for without a valid contract there can be no transfer of title. But a tradition system of transfer can be either causal or abstract. In order to ascertain whether a particular transfer system is causal or abstract (or something in between) the treatment of defects of will, such as error and fraud, offers good evidence. The core element of an abstract transfer system is that the effectiveness of the conveyance is judged independently from the effectiveness of the underlying transaction which formed its basis, with the result that a transfer can be valid even though the underlying transaction is defective. It is a commonplace of legal systems that a party who acted under a defect of will has an action to annul the transaction. But in an abstract system, at least in its purest form, such an action has no effect on the passing of property, with the result that a transfer by the buyer to a sub-buyer is valid, even if the sub-buyer knew of the defect of will. The abstract system in this form was developed by the German scholar Friedrich Carl von Savigny and his pupils in the nineteenth century. As it is the archetype of an abstract system, it is used in comparative law as the standard example of the abstract model. As we will see later, however, this extreme form of abstraction has been abandoned in Germany and seems never to have been adopted in Scotland.
B. THE SALE OF GOODS ACT AND ENGLISH LAW (1) Conceptual difficulties This section asks whether the transfer system for the sale of goods in England is a consensual or traditio system and whether the system is causal or abstract. It analyses the Sale of Goods Act 1979, but also the case law prior to the first Sale of Goods Act of 1893. That case law was not based on a deliberate choice between a causal or an abstract transfer system, if only because such a division was, and remains, unknown to English law. Nor was the Sale of Goods Act drafted on the basis of any particular system of transfer. We should not therefore be surprised to find that neither the Act nor the common law fits neatly into one of the standard types of system. Nevertheless it is possible to say that English law is closer to a causal and consensual transfer system, although certain elements fit better into a tradition system.
2
See further Van Vliet, Transfer of Movables 23-25. 2
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(2) The development of the rules on transfer The Sale of Goods Act 1893, so its long title says, was intended to codify the common law relating to the sale of goods, by which is meant the common law of England. Originally the legislation was not intended to apply to Scotland at all, and it was only during the bill’s passage through Parliament that the necessary amendment was made for Scotland to be included.3 The fact that in many respects the bill did not fit the Scots common law was largely disregarded. When we read that the Sale of Goods Act 1893 purported to codify English common law, we should realise that that law had developed special rules on the passing of property which did not apply outside the area of sale. Originally, a requirement of delivery applied to all transfers of moveables, corresponding to the requirement of “livery of seisin”4 (transfer of possession) applicable in land law.5 Centuries before 1893, however, two important exceptions to the delivery rule had developed: delivery was unnecessary where the transfer was either based on sale or took place by deed (a sealed document). These exceptions still exist. English common law thus had three different ways of transferring title in moveable property: the original rule of delivery, and the newer rules on sale and on transfer by deed. Where a specific object was sold and nothing had to be done to bring it into a deliverable state, property passed to the buyer immediately, even if delivery and payment had not yet taken place. The origins of this rule can be traced back to the sixteenth century.6 Three cases from the early nineteenth century – Hinde v Whitehouse,7 Phillimore v Barry8 and Tarling v Baxter9 – show clearly the rule that property passes when the contract is made. The facts of all three cases were similar. Goods were to be delivered to the buyer some time after the contract of sale. Until then they remained in the seller’s possession. Before delivery could take place the goods were lost as a result of fire. The question was who bore the risk of the fire. As risk in English law is linked to property, the answer depended on whether property had already passed to the buyer. It was held that property in specific goods passes to the buyer at the moment the contract is made, and that the loss was thus the buyer’s. Both the result and the reasoning suggest a consensual system, that is to say, a transfer system in which property passes by contract and without the need for delivery. This rule was carried forward to the Sale of Goods Act. Section 17(1) – the principal rule on the passing of property – provides that: Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.
3
J P Benjamin, Sale of Goods, 7th edn, by A G Guest et al (2006) para 1-001. The process of drafting the Sale of Goods Act is analysed in detail by Lord Rodger of Earlsferry in “The codification of commercial law in Victorian Britain” (1992) 108 LQR 570. 4 Like the verb “deliver”, the noun “livery” derives from the French livrer and the Latin liberare (to deliver up, to hand over). The word “seisin/seizing” or the alternative “sasine” derives from the old-French seisine or saisine. Cf the English “seize” and the French saisir (to get hold of or take possession of). 5 F Pollock and F W Maitland, The History of English Law, 2nd edn (1898) (reprinted, ed S F C Milsom (1968)) vol 2 180-181, 210; F Pollock “Gifts of chattles without delivery”(1890) 6 LQR 446 at 448. The requirement applied for example to the transfer of a freehold interest (an estate in fee simple or in fee tail). 6 J H Baker, The Oxford History of the Laws of England vol VI, 1483-1558 (2003) 740-744. There was, however, a lot of debate as to whether property could pass before payment of the purchase price, and the rule at the time seems to have been that property would pass before payment if the date for payment was settled. 7 (1806) 7 East 558. 8 (1808) 1 Camp 513. 9 (1827) 6 B & C 360. 3
However, in order to categorise the Act’s transfer system from a comparative law perspective, it is necessary to focus on the default rule rather than the rule which the Act happens to set up as the primary rule. The default rule – the rule which applies in the absence of the parties’ express or implicit intention – is to be found in section 18. Rule 1 of section 18 provides that: 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.
Rule 5(1) adds: Where there is a contract for the sale of unascertained 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, the property in the goods then passes to the buyer; and the assent may be express or implied, and may be given either before or after the appropriation is made.
These rules accord with the preceding cases and codify the system of consensual transfer.
(3) A causal system of transfer? The question of whether the transfer system in the Sale of Goods Act is causal, abstract or something different is not debated in English case law and hardly discussed in legal literature.10 Not only the terminology itself but even the question behind it seems largely unknown. This may be explained to a certain extent by English law not having originated in the continental legal tradition, where the debate on this whole issue was based on different texts in Justinian's Corpus Iuris Civilis.11 If, however, the transfer system of the Sale of Goods Act is consensual, the contract itself passing property to the acquirer, it seems an inevitable conclusion that property cannot pass where that contract is void or has previously been avoided.12 This conclusion may now be tested by analysing the effect of various defects which render a contract void or voidable.
(4) Mistake cases13 Among the grounds on which a contract can be void under English law are want of consensus or consideration, and mistake as to the identity of one of the parties or as to the subject matter of the contract.14 Strictly speaking a void contract has no legal consequences whatever.15 As a
10
But see for example T Weir, “Taking for granted – the ramifications of nemo dat”, in M D A Freeman (ed), Current Legal Problems vol 49 (1996) 325; W Swadling, “Rescission, property, and the common law” (2005) 121 LQR 123. 11 L P W van Vliet, “Iusta causa traditionis and its history in European private law” 2003 European Review of Private Law 342. 12 See D L Carey Miller, with D Irvine, Corporeal Moveables in Scots Law, 2nd ed (2005) para 9.17; K G C Reid, The Law of Property in Scotland (1996) para 610; Van Vliet, Transfer of Movables (n 1) 111-114. 13 A thorough historical analysis of cases on mistake of identity is given by C MacMillan, “Rogues, swindlers and cheats: the development of mistake of identity in English contract law” (2005) 64 CLJ 711. 14 See R M Goode, Commercial Law 4th edn (2004) 78. 15 J Chitty, Chitty on Contracts, 29th edn, by H Beale (2004) vol 1 para 1-070; Goode, Commercial Law 78; R J Bragg, “Void and illegal contracts”, in Halsbury's Laws of England, 4th edn, vol. 9(1), Reissue (1998) para 887. 4
result, there is no valid legal ground, no causa traditionis, to support the passing of property. English law therefore draws the conclusion that property cannot pass under a void contract.16 As an illustration, we can examine the decisions in Cundy v Lindsay,17 Ingram v Little18 and Lewis v Averay,19 all of which are cases about mistake. In Ingram v Little the plaintiffs advertised their car for sale. The buyer was a rogue acting under a false name. He wanted to take the car with him at once and paid by a cheque which was later dishonoured. The rogue sold the car to a bona fide third party, Mr Little. The original sellers started proceedings against Little for the return of the car or, alternatively, for damages for its conversion.20 The Court of Appeal held that the contract between the plaintiffs and the rogue was void and that, as a consequence, property in the car had never passed to the rogue. Moreover, it concluded that under the nemo plus rule the rogue had never been able to transfer property of the car to the bona fide purchaser.21 The third party had to return the car to the plaintiffs or pay damages. In his judgment Pearce LJ set out the consequences of voidness and voidability: 22 The real problem in the present case is whether the plaintiffs were in fact intending to deal with the person physically present who had fraudulently endowed himself with the attributes of some other identity or whether they were intending only to deal with that other identity. If the former, there was a valid but voidable contract and the property passed. If the latter, there was no contract and the property did not pass.
The facts of the other two cases are similar: a rogue fraudulently using the name of a respectable firm (Cundy v Lindsay) or person (Lewis v Averay) persuades someone to sell a thing to him. After the object has been delivered, without payment, the buyer resells to a bona fide third party. As in Ingram v Little, it was held that a void contract cannot pass property.23 These decisions point to the transfer system of the Sale of Goods Act as being causal rather than abstract.
(5) Fraud cases Case law about fraud from before the Sale of Goods Act 1893 supports this view. The facts in the cases in question are roughly the same. A buyer receives delivery on the basis of a bad cheque. Before the seller finds out the truth, the buyer sells or pledges the goods to a bona fide 16
Goode, Commercial Law 78; L Crispin Warmington (ed), Stephen's Commentaries on the Laws of England, 21st edn (1950) vol 2, 147; Chitty on Contracts vol 1 para 1-070; Benjamin, Sale of Goods (n 3) para 7-023; Twelfth Report of the Law Reform Committee (Cmnd. 2958: 1966) para 15. 17 (1878) 3 AC 459. 18 [1961] 1 QB 31. 19 [1972] 1 QB 198. 20 The action is comparable, though not similar, to the Civil Law action of revindication. 21 It should be noted that English law has no general protection of bona fide third parties along the lines of § 932 BGB, art 2279 Code civil, or art 3:86 Dutch Civil Code. 22 [1961] 1 QB 31 at 56. 23 In Lewis v Averay [1972] 1 QB 198 Lord Denning said (at 205): “The real question in the case is whether ... there was a contract of sale under which the property in the car passed from Mr Lewis [the seller] to the rogue. If there was such a contract, then, even though it was voidable for fraud, nevertheless Mr Averay [the bona fide sub-purchaser] would get a good title to the car. But if there was no contract of sale by Mr Lewis to the rogue – either because there was, on the face of it, no agreement between the parties, or because any apparent agreement was a nullity and void ab initio for mistake, then no property would pass from Mr Lewis to the rogue. Mr Averay would not get a good title because the rogue had no property to pass to him.” In Cundy v Lindsay [1878] 3 AC 459 Lord Cairns LC said (at 465-466): “there was no consensus of mind which could lead to any agreement or contract whatever ... My Lords, that being so, it is idle to talk of property passing. The property remained, as it originally had been, the property of the Respondents ...” 5
third party, or is declared bankrupt. The seller then brings an action of trover against the third party or the trustee in bankruptcy. Trover, the predecessor of conversion, was the owner’s remedy against anyone in wrongful possession of his goods.24 Thus, in granting an action of trover to the claimant the judge implicitly decided that the claimant had the property in the thing. At the beginning of the nineteenth century, fraud was treated in the same way as mistake: the contract was void and no title passed to the buyer.25 Later, however, the contract came to be regarded as voidable. In Load v Green26 the plaintiffs had sold cloth to a buyer who did not pay for the goods. When the buyer was declared bankrupt, the sellers sued the assignees under a fiat in bankruptcy for trover of the goods. It was accepted that the sale was fraudulent, since the buyer never intended to pay. According to Parke B:27 As the goods were obtained by a fraudulent purchase, the plaintiffs had a right to disaffirm it, to revest the property in them, and recover their value in an action of trover against the bankrupt.
He added that “in consequence of the bankrupt’s fraud upon them, they had a right to annul the contract, and be again the real owners”. 28 In White v Garden29 the defendants sold iron to Parker. Most of the purchase price was never paid. Parker sold the iron on to the plaintiff and ordered the defendants’ lighterman to deliver the goods to the plaintiff. The barge containing the iron was left alongside the plaintiff’s wharf. When the defendants discovered the fraud, they ordered the lighterman to take away the barge and the iron. The plaintiff claimed to have purchased the iron in good faith and sued the defendants for trover. The court followed Load v Green:30 It appears to me that the defendants here intentionally parted with their property in the iron when they caused it to be delivered to the plaintiff; and it is not competent to them, after a third party has by their act been induced to part with his money, to turn round and say that the contract as between them and Parker was null and void, and that Parker had no property, and therefore could pass none to the plaintiff. It appears to me that the doctrine of Parke, B, in Load v Green is well warranted by the authorities.
The decision shows that the seller’s right to annul the contract lapses when the goods are sold on by the buyer to a bona fide purchaser for value. It follows that where the third party was in bad faith or did not give value, property in the goods reverts from the third party to the seller upon the avoidance of the contract between the defrauded seller and his buyer. This rule on third party protection was to be codified at the end of the century in section 23 of the Sale of Goods Act 1893. It created a difference in treatment between the mistake cases, previously considered, and fraud cases which is difficult to justify, as the material facts in both are, from a practical perspective, almost identical.31 In the case of mistake the contract is void 24
D J Ibbetson, A Historical Introduction to the Law of Obligations (1999) 107-112. Noble v Adams (1816) 7 Taunt 59; Earl of Bristol v Wilsmore (1823) 1 B & C 514; Jones v Keene (1841) 2 M & R 348. In Earl of Bristol, for example, Abbott CJ said (at 521) that: “If Miller contracted for and obtained possession of the sheep in question with a preconceived design of not paying for them, that would be such a fraud as would vitiate the sale, and according to the cases which have been cited, would prevent the property from passing to him.” 26 (1846) 15 M & W 216. 27 At 221, my emphasis. 28 At 223, my emphasis. 29 (1851) 10 C B 918. 30 At 927 per Talfourd J. 31 See Shogun Finance Ltd v Hudson [2003] UKHL 62, [2004] 1 AC 919 at para 35 per Lord Nicholls; see also MacMillan (n 13) at 712. 25
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and the bona fide third party will never be protected. In the case of fraud the third party will be protected unless the contract had been avoided before the buyer resold. Moreover, the rule also created a difference in third party protection according to the time when a voidable contract was avoided.32 A major doctrinal challenge was how to explain the effect of such avoidance, and why it did not re-vest property in the seller when it took place after the buyer’s sale to a bona fide purchaser. As we shall see, the challenge was only partially met. Re-vesting of title worked not only between the parties but also against third parties, unless they qualified for third party protection; and third parties in this sense included the buyer’s general creditors and his trustee in bankruptcy.33 This is clear evidence that, even before the Sale of Goods Act 1893, transfer on sale was causal. In an abstract system an act of transfer based on a void contract would pass property, while avoidance would not automatically re-vest property. Instead the transferor would have an unsecured right to the re-transfer of the goods sold.
(6) Analysing third party protection The operation of third party protection may be analysed in different ways. Take the case of a fraudulent acquisition by B of A’s goods, followed by a re-sale by B to C. As we have seen, C will acquire title only if he acquired in good faith and for value before the A–B contract was avoided. This could be explained by saying that avoidance after the resale to C is without retroactive effect, so that, at the time of the resale, B had the property in the thing. But while this explains why avoidance has no effect against third parties in good faith, it does not explain why avoidance works against third parties who were in bad faith or who took without giving value. English common law gives a different explanation. It says that C acquires a good title because, after the resale, A is no longer able to avoid the initial contract with B.34 A version of this view can already be found in White v Garden35, but the judgment of Vaughan Williams LJ in Whitehorn Brothers v Davison, 60 years later, is much clearer:36 Now, pausing there, it is, I think, clear, with regard to this ground of appeal, that, when you have a contract of sale which is voidable on the ground of fraud, or for any other reason, and, before it is avoided by the seller, the buyer, as against whom it could have been avoided, has transferred the subject-matter of the contract to an innocent third person who has given value and has accepted the transfer without either knowledge of anything wrong, or any knowledge of such circumstances as might lead him to wish not to make any further inquiry lest he should find that there was something wrong, the contract cannot be avoided as against that person.
Modern case law shows that avoidance, where allowed, has retroactive effect, thus denying B a title to pass on to C.37 This proposition is to be found in a dictum by Lord Wilberforce that where a contract is avoided on the ground of fraud, it is “is treated in law as never having come into existence”.38 Other authority can be found to the same effect.39 32
Swadling (n 10) at 131. If the seller avoided the contract of sale after the buyer’s bankruptcy, title reverted from the trustee in bankruptcy to the seller, because the trustee in bankruptcy does not take a better title than the bankrupt. See In re Eastgate [1905] 1 KB 465. 34 See also G H Treitel, The Law of Contract, 11th edn (2003) 371. 35 (1851) 10 C B 918. 36 [1911] 1 KB 463 at 476. 37 The question of whether avoidance has retroactive effect was considered but left unanswered in Stevenson v Newnham (1853) 13 C B 285 at 302 per Parke B. 38 Johnson v Agnew [1980] AC 367 at 392-393. 33
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However, even if one does not accept this view on retroactive effect - which is only a dogmatic reasoning to explain a generally accepted result (third party protection) - the rule which restricts
avoidance of the A-B contract in order to protect C does at any rate presuppose that, where it occurs, avoidance has third party effect – that it is able to re-vest C’s title in A. The abstract transfer system associated with Savigny would not accept such third party effect.
(7) Three abstract cases? Thus far the case law has been read as supporting a causal system. In three cases – Haswell v Hunt,40 Milward v Forbes41 and Sinclair v Stevenson42 – one of the parties to a transfer claimed that the contract was fraudulent and that he should be able to annul the transaction and claim in trover. For Swadling, these decisions point to an abstract transfer by mere delivery.43 However, in none of the cases, all of which are reported very briefly, does the judgment actually say that the contract is void or can be avoided and that property nonetheless passed to the defendant and remained with him even in the face of avoidance. In Haswell v Hunt, Eyre CB said that property passed, but added that there was a complete sale ab initio. Most probably he did not accept that the contract could be avoided for fraud or any other reason. The slightly later decision in Milward v Forbes seems equally inconclusive, because the judge did not expressly hold that the contract was fraudulent. In Sinclair v Stevenson the jury was of opinion that the bankrupt had not committed fraud. In short, it seems unlikely that these cases are examples of an abstract approach.
(8) Section 23 The view that English law is causal is further supported by section 23 of the Sale of Goods Act, a provision consolidating the nineteenth-century case law on fraudulent contracts discussed above. It reads: When the seller of goods has a voidable title to them, but his title has not been avoided at the time of the sale, the buyer acquires a good title to the goods, provided he buys them in good faith and without notice of the seller’s defect of title.
From the historical background it is clear that the purpose of this provision is to protect the bona fide purchaser against the avoidance of the contract and the re-vesting of title which is its consequence. But even when section 23 is read in isolation from its background, it can be inferred that avoidance of the contract leads to the avoidance of the transfer and the re-vesting of title in the seller. Section 23 protects the buyer against a seller who has a so-called voidable title. The seller is said to have a voidable title when he has acquired property under a voidable legal act, for example a voidable contract. So if B has fraudulently induced the owner, A, to sell and transfer a thing to him, the contract of sale is voidable at A’s option; upon avoidance title will revert 39
Photo Productions Ltd v Securicor Transport Ltd [1980] AC 827 at 844 per Lord Wilberforce; State Trading Corporation of India v Golodetz Ltd [1989] 2 Lloyd’s Rep 277 at 289 per Lloyd LJ; Hurst v Bryk [2002] 1 AC 185 at 194 per Lord Millett. 40 The judgment is not reported in its own right, but part of it can be found in Tooke v Hollingworth (1793) 5 TR 215 at 231. 41 (1802) 4 Esp 171. 42 (1825) 2 Bing 514. 43 Swadling (n 10). 8
automatically to A. After avoidance the fraudulent party is deemed never to have been owner of the object.44 Consequently, he was never able to transfer title to a third party. So where the thing is resold by B to C, avoidance of the first contract will in principle re-vest C’s title in A. Section 23, however, protects the second buyer (C) against the re-vesting of title by laying down that the fraudster is nonetheless able to pass property to him, provided C bought in good faith, that is, without any knowledge of the seller’s (B’s) title being voidable. The protection is limited to cases where, at the moment of re-sale, the voidable contract has not yet been avoided. If the transfer of property were abstract, avoidance of a mere contract could not return title to the seller, so that a provision along the lines of section 23 would be superfluous. What is more, C would be protected even if he knew that the contract was voidable or if he acquired without value. It follows that it can be inferred from the very existence of section 23 that the transfer system is not purely abstract. Section 23 would, on the other hand, fit into a causal approach.
(9) Illegal contracts Against this view of a causal system it can be objected that property passes under an illegal contract. That was settled by the Judicial Committee of the Privy Council in Singh v Ali.45 A car was sold under an illegal contract. Possession was transferred to the buyer. Some time later the seller re-possessed the car without the consent of the buyer, who brought an action for the return of the car or its value. The Privy Council held that, although the contract was illegal, it was effective to pass title.46 Yet it is unconvincing to see this as evidence of an abstract transfer,47 for illegal contracts are unenforceable rather than simply void.48 In German law the result is the same but the reason different. In Germany an illegal contract is void, and cannot serve as a causa traditionis for a transfer of property, 49 but under an abstract system the validity of the transfer does not depend on the validity of the contract.
(10) Section 48 Another factor which points to the causal nature of the Sale of Goods Act is section 48. Where the buyer fails to pay, the seller has, under certain conditions, the right to resell the goods. Upon resale the original contract is terminated for breach. Where title had already passed to the buyer, it reverts to the seller on termination and without the need for a reconveyance.50 Although section 48 speaks of “rescission” the correct modern terminology would be “termination”.
44
For a discussion of retroactivity in the context of avoidance, see B.(6) above. [1960] AC 167. See also Belvoir Finance Co Ltd v Stapleton [1971] 1 QB 210; Glastnos Shipping Ltd and Continental Chartering & Brokerage Ltd Hong Kong Branch v Panasian Shipping Corporation [1991] 1 Lloyd's Rep 482 at 487 per Steyn J; G H Treitel, The Law of Contract, 11th edn (2003) 480 ff and 496; W R Anson, Law of Contract, 28th edn by J Beatson (2002) 402 ff. 46 Yet Lord Denning said that title would pass only if the contract were executed. In this case the contract was held to be executed, since possession of the car had been transferred to the buyer. It seems strange to require physical delivery when the Sale of Goods Act allows transfer of title without transfer of possession. See AL Diamond, “The effect of an illegal contract” (1960) 23 MLR 451 at 453. 47 Diamond (n 46) at 453 suggests this as a possible alternative explanation. 48 Benjamin, Sale of Goods (n 3) paras 3-027-3-030; Goode, Commercial Law (n 14) 78, 79. 49 § 134 BGB. 50 Benjamin, Sale of Goods (n 3) para 15-101. 45
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Section 48 is in the following terms: (1) (2) (3)
(4)
Subject to this section, a contract of sale is not rescinded by the mere exercise by an unpaid seller of his right of lien or retention or stoppage in transit. Where an unpaid seller who has exercised his right of lien or retention or stoppage in transit re-sells the goods, the buyer acquires a good title to them as against the original buyer. Where the goods are of a perishable nature, or where the unpaid seller gives notice to the buyer of his intention to re-sell, and the buyer does not within a reasonable time pay or tender the price, the unpaid seller may re-sell the goods and recover from the original buyer damages for any loss occasioned by his breach of contract. Where the seller expressly reserves the right of re-sale in case the buyer should make default, and on the buyer making default re-sells the goods, the original contract of sale is rescinded but without prejudice to any claim the seller may have for damages.
Subsection (2) enables the seller to give a good title to the second buyer,51 a power which is needed if the seller resells without first reacquiring property in the goods.52 Does such a resale pass property from the first buyer to the second? Or does property first revert to the seller and then pass from him to the second buyer? The decision of the Court of Appeal in Ward (RV) Ltd v Bignall53 supports the second view.54 Resale amounts to termination of the contract, and termination “divests the buyer of his property in the goods”.55 As “the property has reverted on the resale … the second buyer gets a good title”.56 How does this fit into the continental distinction between causal and abstract systems of transfer? In French and Belgian law, for example, where property also reverts upon termination of the contract, the reversion is explained by the retroactive effect of termination. The contract is deemed never to have existed, and so has never been able to function as a causa, a valid legal ground, for the transfer of property. As a consequence, property is deemed never to have passed to the buyer.57 The same approach was taken by the Dutch Civil Code of 1838. However, according to art 6:269 of the new Dutch Civil Code, termination no longer has retroactive effect. As a result, and even though the transfer system is causal, property does not revert automatically to the seller. Even with hindsight, the contract was valid at the time of the transfer. Instead, art 6:271 of the Code puts the buyer under an obligation to retransfer. The seller’s claim is unsecured: if the buyer becomes insolvent, the seller will not get the goods back. In an abstract system, such as the German system, neither termination, which lacks retroactive effect, nor avoidance of a contract, which does have retroactive effect, returns property to the seller.58 This is because the transfer is independent of any legal ground and remains valid even if the contract falls away retroactively. Instead the seller has an unsecured claim for the retransfer of the goods. 51
Oddly, there is no equivalent provision in subs (3). Ward (RV) Ltd v Bignall [1967] 1 QB 534 at 543, per Sellers LJ; Benjamin, Sale of Goods (n 3) para 15-101 n 91. 53 [1967] 1 QB 534. 54 Benjamin, Sale of Goods (n 3) para 15-127. 55 [1967] 1 QB 534 at 550 per Diplock LJ. 56 At 544 per Sellers LJ. 57 French law: A Bénabent, Droit civil: Les contrats spéciaux civils et commerciaux, 6th edn (2004) para 235; J Ghestin, C Jamin and M Billau, Traité de droit civil, Les effets du contrat, 3rd edn (2001) paras 502–506. Belgian law: S. Stijns, “Ontbinding van wederkerige overeenkomsten bij wanprestatie”, in J Smits and S Stijns, Remedies in het Belgisch en Nederlands contractenrecht (2000) 51 at 105. 58 In German law there are instances in which a defect of will, giving the seller the right to avoid the contract, automatically avoids the transfer of property as well. In these cases the German system, although still abstract in theory, mimics a causal transfer system, since the avoidance re-vests property in the seller. 52
10
We return to section 48. Since property reverts automatically it would be impossible to categorise the transfer system as abstract. Indeed it is non-reversion which is a characteristic effect of an abstract system. It seems unlikely that the re-vesting under section 48 is retroactive. As termination of the contract has no retroactive effect, it should be assumed that the same is true of the re-vesting. Although re-vesting without retroactive effect is rare, it is not impossible. A common example is a sales contract or conveyance under a resolutive condition which, at least in some jurisdictions, does not work retroactively.59 Under certain conditions Dutch law gives the seller of goods a right to reclaim property which, if invoked, re-vests title in the seller without retroactive effect.60 An example explains the practical impact of these different approaches. Suppose A sells sheet steel to B, but remains in possession. B sells the steel to C before paying A. A demands payment within a week and, when payment is not made, terminates the contract and resells the goods to X. Did C obtain property in the goods and, if so, does he remain owner after the termination or does X become owner in his place? Part of the answer can be found in section 47 of the Sale of Goods Act: (1) Subject to this Act, the unpaid seller’s right of lien or retention or stoppage in transit is not affected by any sale or other disposition of the goods which the buyer may have made, unless the seller has assented to it. (2) Where a document of title to goods has been lawfully transferred to any person as buyer or owner of the goods, and that person transfers the document to a person who takes it in good faith and for valuable consideration, then (a) if the last-mentioned transfer was by way of sale the unpaid seller’s right of lien or retention or stoppage in transit is defeated; and (b) if the last-mentioned transfer was made by way of pledge or other disposition for value, the unpaid seller’s right of lien or retention or stoppage in transit can only be exercised subject to the rights of the transferee.
In combination with section 48, which allows the termination of the contract and the revesting of title in the original seller following the exercise of the right of lien or retention or stoppage in transit, section 47 leaves third parties unprotected unless the seller assented to the transfer or, where documents of title were used, unless the third party (C) was in good faith and gave value. In all other cases the third party loses his right and the original seller regains title which he can then transfer to someone else – X in the example above. Apparently, property reverts directly from C to A, and does so automatically. Crucially, this re-vesting works not only against the buyer (B) but against a third party (C) (unless qualifying for third party protection). This could not occur in an abstract system, and indeed is contrary to the most important policy choice behind such systems, namely that third parties should be protected against problems in previous transactions. By its nature an abstract system protects even third parties who were in bad faith or who acquired their interest without value.
59 60
See for example Dutch law: art 3:38 Dutch Civil Code. The right to reclaim (recht van reclame: art 7:39 Dutch Civil Code). 11
(11) No ideal fit One can draw the conclusion that the transfer system of the Sale of Goods Act is both causal and consensual, although, not being drafted with any particular system in mind, it is not always an exact fit. If consensual systems are by definition causal, the Sale of Goods Act is not a purely consensual system. To protect the unpaid seller and to solve the problem of rejection of non-conforming goods, some elements of a tradition system have been smuggled in. Furthermore, while the system is essentially causal, some elements are present which do not fit that model.
(12) Tradition elements The examples below demonstrate that, while the transfer system of the Sale of Goods Act can generally be characterised as a consensual transfer system, it does contain some elements from a tradition system.
(a) Remedies of the unpaid seller In giving the unpaid seller various remedies, such as the right of lien (sections 39-43), the right of stoppage in transitu (sections 44-46) and the right to terminate and resell (section 48), the Sale of Goods Act mitigates the rule of a consensual transfer system which passes property irrespective of payment. Until such time as possession reaches the buyer, the seller is able to reclaim the goods and the property in them. This mimics, at least in its outcome, a tradition system in which property passes only when possession of the goods is transferred to the buyer, thus watering down the consensual transfer system of the Sale of Goods Act.
(b) The buyer’s right to reject The same effect can be seen in the buyer’s right to reject. Where goods delivered to the buyer do not conform to the contract requirements, the buyer has the right of rejection. If property has not yet passed (e.g. goods forming part of a larger bulk), rejection prevents property from passing. If, on the other hand, the buyer has already acquired property, rejection re-vests property in the seller.61 As Goode expresses it, rejection of the goods nullifies delivery.62 Since normally the risk of accidental loss is linked to property, rejection also re-vests risk in the seller.63 In McDougall v Aeromarine of Emsworth Ltd64 property of a ship which was in the process of being built passed to the buyer on payment of the first instalment. When it was eventually delivered to the buyer, he rightfully rejected the ship because it did not meet the 61
Kwei Tek Chao v British Traders & Shippers Ltd [1954] 2 QB 459 at 487 per Devlin J; McDougall v Aeromarine of Emsworth Ltd [1958] 1 WLR 1126 at 1132 per Diplock J; Tradax Export SA v European Grain & Shipping Ltd [1983] 2 Lloyd's Rep 100 at 107 per Bingham J (“a clear, unequivocal and bona fide rejection of goods liable to rejection has the effect of preserving or revesting the property of the goods in the seller”) (for a comment on this case, see Goode, Commercial Law (n 14) 371 n 18); Gill & Duffus SA v Berger & Co Inc [1984] AC 382 at 395 per Lord Diplock. Section 36 provides that the buyer need not return the rejected goods to the seller, that is to say, he need not redeliver them physically. It suffices if he notifies the seller of the rejection. Note that s 36 is not about re-vesting of property. 62 Goode, Commercial Law (n 14) 362. Here the term “delivery” most probably denotes the transfer of property. 63 Goode, Commercial Law (n 14) 363; Benjamin, Sale of Goods (n 3) para 12-065. 64 [1958] 1 WLR 1126. 12
contract requirements. As a result, property was held to return to the seller. In Kwei Tek Chao v British Traders and Shippers Ltd,65 Devlin J explained the reasoning. Property in the goods passes to the buyer “subject to the condition that they revest if upon examination he finds them to be not in accordance with the contract. That means that he gets only conditional property in the goods, the condition being a condition subsequent.”66
(c) Rejection and the seller's right to cure Rejection does not always lead to the termination of the contract in question. It is true that where generic goods are defective and do not correspond to the contract requirements, one of the remedies available to the buyer is to terminate the contract.67 But termination is a drastic remedy, and in many cases the interests of both parties are better served by maintaining the contract and rejecting only the goods which have been offered.68 The buyer may elect for replacement goods. If so, the contract of sale will remain valid and the seller can make a second tender.69 In this case both parties agree that the contract should not be terminated and that the seller should have a fresh chance to deliver. Furthermore, the buyer can even be obliged to accept a new tender against his will. For, in principle, the seller has the right to cure, that is, the right to replace the defective goods with a new delivery of conforming goods, as long as the time for delivery has not yet expired.70 Making this new tender entails appropriating substitute goods to the contract, with the result that a new transfer of property is needed. The possibility of rejecting a tender without terminating the contract can be explained only if the transfer of property is treated as a distinct legal act. Where property has already passed to the buyer, rejection will nullify the transfer of the goods first tendered. Since facts cannot be nullified, whereas legal acts can, we should assume that the agreement about the passing of property is nullified. In continental legal doctrine this agreement is called the “real agreement”. It is the agreement about the passing of property between transferor and acquirer. The adoption of this concept in English law helps explain how the rejection of goods works. Although the contract and the transfer will normally coincide they should nevertheless be seen as two distinct legal acts. Using the concept of real agreement the process of rejection may be explained as follows. The legal act of transferring property of the goods (i.e. the real agreement) has been made under an implicit resolutive condition. It is important to note that the condition is not attached to the entire contract but solely to the transfer. This can be explained only by regarding the transfer of property as a distinct legal act, that is to say, by
65
[1954] 2 QB 459 at 487. A condition precedent, also called a suspensive condition, suspends the effects of the legal act to which it is attached until the occurrence of some uncertain event in the future. It does not postpone the creation of the legal act but merely freezes its legal consequences. On the other hand, if a legal act is subject to a condition subsequent, or resolutive condition, occurrence of the (uncertain) future event causes the legal act’s consequences, which have already materialised, to lapse. Before fulfilment of the resolutive condition, however, the legal act is fully effective. 67 Goode, Commercial Law (n 14) 362. 68 As to the conditions under which rejection is possible, see Goode, Commercial Law (n 14) 358-361. 69 In principle the buyer has no right to claim specific performance, that is to say, he is unable to demand that the contract be properly performed and conforming goods be tendered. See Goode, Commercial Law (n 14) 387388. 70 Borrowman Phillips & Co v Free & Hollis (1878) 4 QBD 500; Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India (The “Kanchenjunga”) [1990] 1 Lloyd's Rep 391; see Goode, Commercial Law (n 14) 363-366. 66
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recognising the real agreement. For a condition cannot be attached to a factual act; it can be attached only to a legal act or part of a legal act such as an obligation arising from a contract. The idea of real agreement is also of assistance when goods are rejected before property can pass. In the sale of generic goods, particular goods must be appropriated to the contract as the goods to be transferred to the buyer. The act of appropriation commonly requires agreement between the parties.71 This is the agreement about the passing of property of the appropriated goods. If the buyer notices a defect before the appropriation is completed, the resulting rejection will prevent property from passing, as a result of the buyer's refusal to assent to the appropriation.72 A similar explanation can be used where the amount of goods delivered is smaller or larger than the amount contracted for. The buyer may reject such a tender.73 If he rejects before having assented to the appropriation, no appropriation will take place. On the other hand, if he discovers the discrepancy only after having assented to the appropriation, he may reject the goods by avoiding the appropriation, i.e. the real agreement. Where too many goods are delivered the buyer may opt to reject only the surplus. If he does so, and physically separates the surplus from the contracted quantity, the property in the surplus re-vests in the seller.
(13) Abstract elements? The judgment by Lush J in Stocks v Wilson74 does not fit into the causal transfer system which is otherwise characteristic of the Sale of Goods Act. In this case the plaintiff had sold and transferred furniture to the defendant under a bill of sale. The defendant, still an infant, had fraudulently led the plaintiff to believe that he was of full age. The furniture was sold on to third parties. The plaintiff sued the defendant for damages. According to Lush J: 75 Mr Newbolt [counsel for the defendant] also contended that since the Infants Relief Act, 1874, which avoided all contracts by an infant except for necessaries, the equitable principle was no longer available. Again I think that this involves a confusion between the remedy on the contract and the remedy in equity for the fraud. The fact that the contract is no longer voidable but void affects the liability on the contract, but does not touch the liability which I am discussing. I must refer in passing to another suggestion which was made in the course of the argument, namely, that since that Act [Infants Relief Act 1874] an action of detinue or conversion would lie. I thought at the time that there might be some foundation for this suggestion and that, as at common law an infant who when of full age avoided the contract would have divested himself of the property, so now it might be contended that the whole transaction was avoided by the Act and that the property had not passed at all. I am satisfied that that view is wrong and that the property passed by the delivery, notwithstanding the fraud, and that the plaintiff has a remedy in equity or none at all.
71
Agreement is not needed where the goods are appropriated by accident. Cf M G Bridge, The Sale of Goods (1997) 198. In most cases appropriation will already have taken place by the seller acting unilaterally, and thus before the buyer is able to inspect the goods. In many contracts the parties agree in advance, expressly or by implication, that the seller may appropriate goods to the contract, for example by handing over certain goods to a carrier. Here the buyer agrees in advance to the act of appropriation. As said above, regardless of whether the act of appropriation has already taken place, the buyer may reject the tender and thus re-vest property in the seller. 73 Sale of Goods Act 1979 s 30(1), (2). A buyer who does not deal as consumer may not reject the tender when the shortfall or the excess is so slight that rejection would be unreasonable: s 30(2A). 74 [1913] 2 KB 235. 75 At 246. 72
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The remark that property of the goods passed even though the contract was void under the Infants Relief Act 1874 is, as Lush J expressly says, a remark in passing. The question whether or not property can pass on the basis of a void contract is not discussed. As a result, it is wrong to attach much importance to this judgment. On the other hand, the judgment itself, and the fact that it has hardly attracted attention in later case law and literature, illustrate that English law has never tried to set up a coherent theory of transfer. The modern view is that sales contracts made by a minor are not void or voidable but merely unenforceable. It can be inferred from section 3 of the Minors Contracts Act 1987 that property can pass on the basis of such a contract: Where – (a) a person (“the plaintiff”) has after the commencement of this Act entered into a contract with another (“the defendant”); and (b) the contract is unenforceable against the defendant (or he repudiates it) because he was minor when the contract was made, the court may, if it is just and equitable to do so, require the defendant to transfer to the plaintiff any property acquired by the defendant under the contract, or any property representing it.
(14) Postscript: the transfer of money Finally, it seems worth mentioning that cases in which money is paid from one bank account to another on the basis of a contract which is void or later avoided are of no assistance to our question. The payment of money cannot be seen as a transfer of property, a passing of title, unless payment takes place with banknotes and coins. Otherwise the “transfer” of money amounts to an order to the bank to debit one account with a certain sum and to credit another account with the same sum. This is an accounting act which is outside the field of property law. The money in the bank account forms a claim against the bank. The payer’s claim is not assigned to the payee.76 Even in a causal system the debiting and crediting of the accounts does not require a valid contract underlying the payment. Consequently, undue payment will never give rise to a proprietary remedy unless identifiable banknotes and coins have been used. Cases like Westdeutsche Landesbank Girozentrale v Islington LBC,77 in which money was paid on the basis of a contract void as ultra vires, do not, therefore, show that English law has an abstract transfer system.
C. THE POSITION IN SCOTLAND (1) Abstract or causal? When reading the Scottish institutional writers we should understand that their exposition of the transfer of moveables consisted in comments on Roman law, and that at the time when they were writing there was no prevailing view as to whether the transfer system of Roman law was abstract or causal. The case was no different outside Scotland. Only from the beginning of the nineteenth century was a transfer theory developed by Friedrich Carl von Savigny and his followers in and outside Germany. Before then the terms “abstract” and 76 77
Goode, Commercial Law (n 14), 460, 469. [1996] AC 669. 15
“causal” in relation to transfer systems were unknown. From the rediscovery of Justinian’s Digest until Savigny no transfer theories in the strict sense of the word had been developed. It is true that commentaries on Roman law before Savigny often contained remarks on the effects of a void contract or avoided contract on the passing of property, but these remarks were scattered and there was no consistent underlying theory. Many authors contradicted one another and even themselves.78 Johannes Voet, a writer with considerable influence in Scotland, favoured an approach which today would be described as causal:79 If a contractus bonae fidei has been made as a result of fraud, it is ipso iure void, so that restitutio is not necessary… And since something which is void cannot have any consequences, it follows that neither ownership nor any other right can be held to have passed to the buyer on the basis of the traditio following the transaction. For a bare traditio never transfers ownership; it does so only if the traditio has been preceded by a sale or another legal ground which is valid.
The Scottish institutional writers, however, appear to have been inconclusive on whether the transfer of moveable property requires a valid legal ground.80 When an answer to this question was eventually given, towards the end of the 20th century, it was provided not by case law but in the writings of legal academics. In his Short Commentary T B Smith concluded that the Scottish system of transfer is abstract,81 and this conclusion has been accepted by modern scholars.82
(2) Two systems of transfer The position is complicated by the fact that in the case of sale – the prime example of a voluntary transfer – two different systems are of potential relevance. One is the common law which, at least in its modern interpretation, is an abstract system, as just seen. The other is the system under the Sale of Goods Act, first introduced in 1893 and now re-enacted as the Sale of Goods Act 1979. As the 1893 Act was intended to codify English common law, its introduction to Scotland was a significant Anglicisation. For that reason the transfer of moveable property on sale forms a good example of Scots law as a mixed legal system. As already seen, the transfer system of the Sale of Goods Act can probably be characterised as causal. But so far as Scotland is concerned it has been suggested that where a contract of sale is void or has been avoided – with the result that the 1979 Act does not apply – the transfer may still be valid under the rules of common law, which (being abstract) require delivery but not a valid contract.83 At first sight it may surprise that two different transfer systems can apply to a transfer at the same time. In English law the transfer of moveable property on sale is based only on the rules of the Sale of Goods Act. That means that if the contract of sale is invalid, property in the goods cannot pass to the buyer, while if the contract is avoided afterwards, with
78
Van Vliet (n 11). Commentarius ad Pandectas vol 1, comment on D 4.3: “Si dolus causam dederit contractui bonae fidei, is ipso iure nullus est, ut restitutione opus non sit… Cumque id quod nullum est, nullum possit effectum producere; consequens est, ut neque dominium neque jus ullum aliud ex subsecuta ad negotium nullum traditione possit videri in emtorem translatum: nunquam enim nuda traditio dominium transfert: sed ita, si venditio aut alia justa causa eaque valida praecesserit” (my emphasis). 80 Carey Miller, Corporeal Moveables (n 12) para 8.08. 81 A Short Commentary on the Law of Scotland (1962) 539. 82 Reid, Property (n 12) paras 608-612; Carey Miller, Corporeal Moveables (n 12) paras 8.6-8.10. 83 Reid, Property (n 12) para 610 79
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retroactive effect, property which initially passed to the buyer reverts to the seller. In Scots law, however, the transfer may nonetheless take effect provided that it is valid under the rules of the Scots common law. As that law, in its modern interpretation, does not require a valid legal ground, the primary requirement is a transfer of possession to the buyer with the intention to pass property. The result is that a void contract or an avoided contract can pass title if followed by a transfer of possession. In the words of Kenneth Reid:84 But while the absence of a valid contract of sale necessarily bars transfer under the Act [the Sale of Goods Act] it may not be a complete bar to transfer, for the invalid contract may have been followed by a form of conveyance which is valid at common law, that is to say, by delivery of the goods accompanied by mutual intention to transfer ownership; and if it is correct that the abstract theory governs transfers at common law then there can be no reason to deny effect to such a transaction. A valid conveyance has followed on an invalid contract, with the result that ownership passes to the “buyer”.
(3) How abstract is transfer at common law? The fact that common law transfers in Scotland are now identified as abstract does not mean that the system of transfer is comparable to the German abstract system as devised by Savigny. The abstract transfer systems which operate today in both Scotland and Germany are much milder than the system as originally developed by Savigny and his followers. In Savigny’s view a defect of will, such as fraud, mistake or undue influence, seems never to have given its victim a proprietary remedy to claim back the thing transferred. The seller had the option to annul the contract of sale, but not to annul the transfer itself. As a result, property always passed on the basis of a void contract, while avoidance of a voidable contract did not automatically re-vest title in the seller. Instead the seller had an unsecured claim that property should be retransferred to him on the basis of undue payment. As German law in the nineteenth century did not recognise any general principle of third party protection, the abstract transfer system had a practical function.85 An abstract system protects third parties, at least to some extent, because it prevents a defect in a sales contract from influencing a subsequent transfer by the buyer to a sub-buyer. To illustrate this with the standard ABC example: if voidness or avoidance of the initial contract between A and B does not prevent B from becoming and remaining owner of the thing, B is able to give a good title to C. No special provision protecting a bona fide buyer is needed to achieve this result. This justification for the abstract transfer theory was not used by Savigny and appeared only much later, in the second half of the nineteenth century. In the preliminary draft of the German Bürgerliches Gesetzbuch a general protection for third parties was consciously omitted,86 and protection was left instead to the principle of abstraction.87 Later, however, it was decided to provide for a general third party protection after all.88 The draftsmen did not draw the conclusion that the principle of abstraction had ceased to be needed to protect third parties. Yet 84
Reid, Property (n 12) para 610. The exception, criticised by Johow, was §§ 306-308 of the Allgemeines Deutsches Handelsgesetzbuch (Commercial Code) of 1861. 86 W Schubert, Die Entstehung der Vorschriften des BGB über Besitz und Eigentumsübertragung (1966) 26; R Johow, Entwurf eines bürgerlichen Gesetzbuches für das Deutsche Reich, Sachenrecht, Begründung vol 2 (1880) 740-750, 766-767, in W Schubert (ed), Die Vorlagen der Redaktoren für die erste Kommission zur Ausarbeitung des Entwurfs eines Bürgerlichen Gesetzbuches, Sachenrecht vol 1 (1982). 87 Together with prescription. 88 § 877 Erster Entwurf (first draft of 1888). See: W Schubert, Die Entstehung der Vorschriften des BGB (n 86) 149-154. 85
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this protection is clearly superfluous because, even if Germany had opted for a causal system, the subsequent acquirer would have been sufficiently protected.89 In the case of an invalid or non-existing legal ground for the transfer, a causal system would prevent title from passing to the acquirer. Under § 932 BGB a second acquirer would then be protected against the first acquirer's lack of title, provided he is in good faith. When this provision applies, the second acquirer becomes owner of the asset. Although the abstract principle continues to apply in modern German law, it has been eroded in practice by the notion of “identity of defect” (Fehleridentität) between contract and conveyance. It is accepted that the transfer, the conveyance, is independent and that defects in the underlying contract do not automatically spill over to the conveyance. At the same time, however, Wiegand stresses that no artificial segregation should be made between the two legal acts.90 In every case it should be ascertained whether the transfer is affected by the same defect as the contract. If, as often, both legal acts suffer from the same defect, this should be openly acknowledged, despite the obvious effect of eroding the abstract transfer system. Under German law, serious defects of will, such as fraud, undue influence and duress, will normally affect both the contract and the transfer. As a result, the victim may annul the transfer as well as the contract. It is also accepted that usury renders a transfer void when the transfer gives effect to the usury. Transfers for the purposes of security can also be void for reasons of usury. Similarly, legislation on unfair standard form contracts may render void not only the contract but also the transfer itself. Identity of defect is, however, hardly ever accepted in respect of error, the most common defect of will, except in cases where the wrong thing has been transferred or a transfer has been made to the wrong person. Where a statutory provision entails voidness it is vital to check whether or not the voidness is aimed only against the contract or also at the transfer itself. Moreover, in German law parties to the contract and transfer may opt out of the abstract transfer system by treating them as a unitary transaction (Geschäftseinheit) in the sense of § 139 BGB, or by making the transfer under a resolutive condition that the underlying contract is and remains valid.91 One effect of these developments is to erode the main policy reason for including the abstract transfer system in the German Civil Code. For if third party protection is provided in some other way, the need for the abstract system is reduced accordingly.92 It seems that the radical conclusions which nineteenth century German law drew from the abstract system are not accepted in Scots law, and that Scots law in this respect has the same approach as modern German law. Reid writes: 93 Where there is a real vice and hence no consent there can, of course, be no transfer. Conversely, where there is consent, albeit wrongfully induced, ownership passes but the title of the transferee is voidable at the instance of the transferor.
89
See also Staudinger/Wiegand, Kommentar zum Bürgerlichen Gesetzbuch, mit Einführungsgesetz und Nebengesetzen (2004) vol 3: Sachenrecht § 929, Rdnr 27; W Wiegand, “Die Entwicklung des Sachenrechts im Verhältnis zum Schuldrecht” (1990) 190 Archiv für die civilistische Praxis 112 at 136; M Wolff and L Raiser, Sachenrecht (1957) 238. 90 Staudinger/Wiegand, Kommentar zum Bürgerlichen Gesetzbuch vol 3 (n 89) § 929, Rdnr 18 and 28. 91 Staudinger/Wiegand, Kommentar zum Bürgerlichen Gesetzbuch vol 3 (n 89) vol 3 § 929, Rdnr 18-28. For a detailed and recent discussion of the “perforations” of the abstraction principle, see J T Füller, Eigenständiges Sachenrecht (2006) para 3. 92 Staudinger/Wiegand, Kommentar zum Bürgerlichen Gesetzbuch vol 3 (n 89) § 929, Rdnr 27. 93 Reid, Property (n 12) para 614. 18
A year later he adds that:94 Only in relatively unusual circumstances will the factors invalidating the contract not also have the effect of invalidating the conveyance.
Carey Miller takes the same view, saying that:95 Where the analysis is abstract, the issue will be whether the notional “agreement” inferred from the circumstances under which the thing was handed over – including, of course, appropriate inferences drawn from the circumstances of the parties’ antecedent contract – is fundamentally defective and, accordingly, void or affected only to the extent of being voidable and, therefore, effective pending reduction.
This interpretation of the abstract transfer system removes one of the most important criticisms made of the German abstract system, namely that it makes an artificial division between the contract and the transfer, and disregards the fact that, where the contract was made under the influence of a defect of will, the transfer usually took place under the influence of the same defect of will, with the result that both legal acts should be voidable and not only the contract. In an English case, Chaplin v Leslie Frewin,96 Lord Denning MR addressed the same issue in the context of a minor who had assigned his copyright: At any rate a disposition is voidable when it is made in pursuance of a contract which is not for the benefit of the infant. The law is not so absurd as to hold that a contract to make a disposition is voidable, and that the disposition itself is not. If the infant is to be protected, the law must be able to intervene as well after as before the disposition is made.
The Scottish approach takes away much of the practical importance of the interplay between the causal system of the Sale of Goods Act 1979 and the abstract system of the common law, as described above. If the contract is void or has been avoided, the transfer could still be valid under the abstract transfer system of Scots common law; but in most cases the common law transfer will also be void or voidable, as it is affected by precisely the same defect. As there is no general provision on third party protection in Scots law, this acknowledgement of the notion of “identity of defect” reduces the level of third party protection which the abstract system otherwise offers. Gordon explicitly mentions third party protection as a reason for adopting an abstract transfer system: 97 It would seem that only if the purported transferee’s taking could be characterised as theft would the original transferor be able to follow the property into the hands of a bona fide acquirer from the transferee. In accordance with its principles, therefore, Scots law should favour an abstract system of transfer.
In addition to the problem of “identity of defect” there is another important point of criticism against the abstract transfer system. In the standard ABC transaction in which the contract between A and B is void or has been avoided, C gets a good title even if he knew or should have known about the defect or if he did not give value. Reid and Carey Miller circumvent this undesired result by recourse to the rule of Scots common law that third parties are protected only if they are bona fide and gave value. Using the typically Scottish doctrine 94
K G C Reid, “Obligations and property: exploring the border” 1997 Acta Juridica 225 at 235. Carey Miller, Corporeal Moveables (n 12) paras 8. 10, 10.17. 96 [1966] Ch 71 at 90. See also G H Treitel, The Law of Contract, 11th edn (2003) 549. 97 Reid, Property (n 12) para 609 (W M Gordon). 95
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of “offside goals” their reasoning is as follows: even if A, who is defrauded by B, cannot avoid the transfer from A to B, C’s knowledge of the fraud renders the transfer from B to C voidable at the option of A.98 This is a doctrine unavailable to German law. It solves part of the problem and makes the Scots system slightly less abstract than the current German system, although it is unable to solve the problem of the bona fide third party who gave no value. The above analysis of Scots and German law shows that whether the abstract/causal divide has important differences in practice will depend on just how abstract the transfer system in question is – on how it treats defects of will. When voidness or voidability is based on statute, the effect on the transfer often depends on the formulation of the particular statute. Statutory provisions enabling an administrator in insolvency to avoid transactions made by the insolvent in fraud of his creditors do not always distinguish between the contract and the transfer based on the contract, or they even explicitly provide that both legal acts may be avoided.99 Similarly, statutory voidness, such as voidness for acting ultra vires, will often affect both the contract and the transfer. On the other hand, in the case of incapacity, for example minority, it might happen that the contract was made when the party in question was still a minor and that the transfer took place later, after the minor came of age. Is this then a good example of where the abstract system takes a wholly different approach from the causal system? The answer is probably no, for a causal system might say that, by transferring property after coming of age, the transferor implicitly affirms the voidable contract. If so, he cannot afterwards avoid the contract and make property re-vest in him.
D. CONCLUSION Using continental terminology we can identify the English transfer system for the sale of goods as one which is both consensual and causal. This system was already in place before 1893 and was codified in the Sale of Goods Act 1893 and in its successor, the Sale of Goods Act 1979. In a consensual system no delivery of the goods is needed in order to pass property; the consensus between the parties suffices. The term “causal” means that the transfer of property on sale needs a valid contract. Where the contract is void property cannot pass, and where property has passed on the basis of a voidable contract, property reverts to the seller with retroactive effect if the contract is avoided. The transfer system of Scots common law can be identified as an abstract and tradition system. In a tradition system mere consensus does not suffice to pass property, and delivery is also required. That the system is also “abstract” indicates that the validity of the transfer of property is viewed independently of the validity of the underlying contract of sale. This means that the transfer may be valid even though the underlying contract was void from the outset or was later avoided with retroactive effect. In the case of sale, this arrangement was replaced by the Sale of Goods Act, which introduced a totally different system of transfer. However, the Sale of Goods Act did not fully supersede the Scots common law. Where the contract of sale is void or where a voidable contract has been avoided, both transfer systems operate at the 98
Reid, Property (n 12) para 692; Carey Miller, Corporeal Moveables (n 12) para 10.17. In the abstract transfer system of South African law, for example, property reverts to the administrator in insolvency when the transaction is annulled: s 34(1) of the Insolvency Act 24 of 1936 explicitly renders the transfer void. In Roos NO v. Kevin & Lasia Property Investments BK 2002 (6) SA 409 (T), at 420-422 the Transvaal Provincial Division rightly draws the conclusion that the abstract system is irrelevant if the transfer itself is declared void. German law, however, takes a different approach: where an insolvent’s disposition is set aside the insolvency administrator has a claim for the retransfer of the asset; ownership does not revert automatically. See § 143 Insolvenzordnung; L. Häsemeyer, Insolvenzrecht, 3rd edn (2003) nr 21.12-21.13 99
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same time; for where delivery has taken place, property may still pass on the basis of the common law, even though it cannot pass on the basis of the Sale of Goods Act. This is because while Scots common law demands delivery, it does not demand a valid underlying contract of sale.
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