Commercial Law 201

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Lecture 7
1

Property II: passing of property in unascertained goods

Unascertained goods

Remember that by virtue of S16 SGA, no property can pass in unascertained goods until they
become ascertained. What does this mean? The answer varies according to the form that the
unascertained goods take. First of all, unascertained goods can be defined as goods that are
not identified and agreed upon when contracting, the goods are e.g. still in a bulk.
If the goods are to be manufactured by the seller, ascertainment occurs as a result of the
process of manufacture. If goods are sold by a generic description e.g. 100 tons of wheat,
they become ascertained when 100 tons of wheat are delivered (usually simply made
available) to the buyer. Third, the goods may be part of an undivided bulk. In this case the
goods become ascertained only when it can be established which bit of the bulk is going to be
given to the buyer.
In all these examples the later events referred to make the goods ascertained, the events can
never make the goods into specific goods, because the nature of goods is determined when
the contract is made. In all these examples the goods were unascertained when the contract
is made.
Once ascertained, the passing of property will depend on the parties intentions (S17 SGA).
But there will be many contracts for the sale of goods where the parties do not express their
intention as to when property shall pass, so reliance must be made on the rules of presumed
intention in S18. Rule 5 applies to unascertained goods. In practice this is the most important
of the rules as most commercial contracts involve unascertained goods.
S18 Rule 5
(1)

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

(2)

Where, in pursuance of the contract, the seller delivers the goods to the buyer or to
a carrier or other bailee or custodier (whether named by the buyer or not) for the
purpose of transmission to the buyer, and does not reserve the right to disposal, he is
taken to have unconditionally appropriated the goods to the contract

In this session we will mainly look at Rule 5(1), which contains two basic requirements for
property to pass in unascertained goods - goods complying with the contract must be
unconditionally appropriated to the contract; secondly the other party must give his assent.
2

Meaning of unconditional appropriation

Atiyah -Some ascertained and identified goods must be irrevocably attached or earmarked
for the particular contract in question.
One of the commonest and simplest ways in which unconditional appropriation occurs is by
delivery. If the seller actually delivers goods answering the contract description, this is an
appropriation which, subject to the question of assent, will pass property to the buyer.

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Rule 5(2) gives another illustration of an unconditional appropriation i.e. delivery to a carrier
like DHL. But Rule 5(2) must still be read in conjunction with S16 because it is clear that if the
seller delivers the goods to a carrier still mixed with other goods, no property can pass,
because the goods are still unascertained A very good case to illustrate an act of appropriation is
Healey v Howlett [1917] 1 KB 337
B ordered 20 boxes of mackerels from S, a fish exporter in Ireland. S despatched 190
boxes and instructed the railway officials to earmark 20 of the boxes for B. The train was
delayed before Bs boxes were earmarked, and by the time this was done the fish had
deteriorated. Held -Property in the fish had not yet passed to B, the boxes were still at Ss
risk when they deteriorated. Because it was not possible to say which boxes belonged to B
until they were earmarked, no goods had been appropriated to individual contracts.
There are many cases on the meaning of unconditional appropriation, which indicate the
variations possible depending on the type of goods and circumstances of the case. The case
of
Carlos Federspiel & Co v Twigg [1957] 1 Lloyds Rep 240 turned on the question
whether the goods had been unconditionally appropriated.
The sellers manufactured bicycles to the buyers order. The bicycles were made and
packed in containers with the buyers name and address on them, but before the goods
could be shipped, the sellers became insolvent. Held -Property had not yet passed, for the
following reasons:
(i)
(ii)
(iii)
(iv)
(v)

A mere setting apart by the seller of the goods is not enough. If that was all, he could
change his mind and use those goods in some other contract. Instead the parties
must have had an intention to attach the contract irrevocably to those goods.
It is by agreement of the parties that the appropriation is made.
An appropriation by the seller with the assent of the buyer may be said always to
involve an actual or constructive delivery.
If the goods are still at the sellers risk that is prima facie an indication that the
property has not passed to the buyer.
Usually the appropriating act is the last act to be performed by the seller.

The case law is therefore very strict on what constitutes an unconditional appropriation. You
can maybe think of it in a way that once goods have become unconditionally
appropriated, there is no way back for the seller to sell to the buyer. Once the goods are
unconditionally appropriated to the contract with the buyer, the seller cannot change his
mind anymore.
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Meaning of assent

Assent is usually not a problem in this context as it can even be implied/inferred from the
circumstances. Implied assent and the application of Rule 5 was discussed in
Pignatoro v Gilroy & Son [1919] 1 KB 459
S sold some rice to B from a specified parcel at a particular place, and sent B a note of
appropriation. B failed to reply for a whole month. Held - Bs assent was implied from his
failure to reply.
4

Transfers other than by unconditional appropriation ascertainment by

exhaustion

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Although unconditional appropriation is the usual way in which ownership is transferred to the
buyer, it is not the only possible way. Instead appropriation may also occur by exhaustion i.e.
all other orders have been removed, thus ascertaining the remaining goods as belonging to
the buyer, so ascertainment and appropriation occur at the same time. This situation is
specifically provided for by S18 Rule 5 (3) which states:
S18 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 less
than) that quantity, then, if the buyer is the only buyer to whom goods are then due
out of the bulk
(a)

the remaining goods are to be taken as appropriated to that contract at

when the bulk is so reduced; and

(b)

the property in those goods then passes to the buyer.

the time

A good case to illustrate ascertainment and appropriation by exhaustion is

Karlshamns Oljefabriker v Eastport Navigation Corp [1982] 1 All ER 208
The buyer bought 6.000 tons of copra from the seller. The sellers shipped 16.000 tons of
copra on one ship, part of which was intended for the buyer and part for other buyers. The
ship called first at Rotterdam and then at Hamburg, discharging all the copra meant for
other buyers, so that at this stage the only copra left was that destined for the buyer.
Held -At this final stage, property passed to the buyer because the goods had become
ascertained by a process of exhaustion.
Rule 5(3) expressly states the principle of ascertainment and appropriation by exhaustion,
identified in the Karlshamns case. Property passes to the buyer at the moment the bulk is
reduced to the quantity to which the buyer is entitled, provided that:
i) The goods are in a deliverable state.
ii) The buyer is the only buyer remaining entitled to goods from the bulk in question.
iii) The buyer assented to the appropriation. (but in the absence of evidence to the
contrary, assent will be implied from the mere fact that B agreed to buy from the
specific bulk )
Having discussed the different ways in which unascertained goods can become ascertained,
we will finally we have to look at the important issue of the passing of risk in a contract of sale.
5

When does risk pass?

Remember, when we first talked about the importance of determining when ownership passes
from the seller to the buyer, we said it was in part because other issues turned on ownership.
The most important of these issues is risk i.e. the question of which of the seller or buyer is
responsible for any loss of or accidental damage to the goods. As with ownership questions,
the parties may expressly agree in their contract who is to suffer loss, but very frequently they
fail to make provision for this eventuality. As one or other of the parties may not have
insurance to cover the loss you can see that disputes frequently arise over this issue.
The basic rule is set out in S20 Sale of Goods Act 1979:

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S20(1) SGA

Unless otherwise agreed, the goods remain at the sellers risk until the
property in them is transferred to the buyer, but ,when the property in
them is transferred to the buyer the goods are at the buyers risk whether
delivery has been made or not.

Remember that in a contract for the sale of specific goods in a deliverable state S18 Rule 1
says that property passes when the contract is made. Thus the problem can arise that the
buyer acquires the ownership of the goods whilst they are still in the possession of the seller,
if those goods are then destroyed without the seller being at fault, responsibility for their loss
falls on the buyer.
Atiyah describes this legal position as grotesque and suggests that a more reasonable rule
would have been to link risk with control, for the person in control of the goods (usually by
being in physical possession) is best able to take proper steps for their protection and to
cover loss by insurance. For this reason the basic rule on risk has been changed in
consumer cases by the Sale and Supply of Goods to Consumers Regulations 2002.
Thus, S20SGA has been amended accordingly:
S20(4)SGA

In a case where the buyer deals as a consumer.subsections (1) to (3)

above must be ignored and the goods remain at the sellers risk until
they
are delivered to the consumer.

This is an important provision which students often overlook. Please remember that in a
consumer contract risk passes on delivery according to S20A SGA.
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Exceptions to the general rule of risk

The basic rule in S20(1)SGA is subject to qualification S20(1)

Unless otherwise agreed, the goods remain at the sellers risk until the
property in them is transferred to the buyer, but ,when the property in
them is transferred to the buyer the goods are at the buyers risk whether
delivery has been made or not.

S20(2)

But where delivery has been delayed through the fault of either buyer or
seller the goods are at the risk of the party at fault as regards any loss
which might not have occurred but for such fault.

S20(3)

Nothing in this section affects the duties or liabilities of either seller or

buyer as a bailee or custodier of the goods of the other party.

.
Thus the general rule on risk is varied where
i)
ii)

It is displaced by contrary agreement between the parties.

Even where risk is prima facie on one party, it may be shifted, wholly or partly, as the
result of fault by the other.
iii) Where the seller is authorised to send the goods, the Act provides special rules for
the risks of transit.

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7 Contrary agreement
Many sales contracts expressly separate the passing of risk and property. Commonly, in
standard terms and conditions of sale, the seller will provide that risk is to pass on delivery but
property is not to pass until the goods have been paid for(this is called a retention of title
clause, we will consider these in another lecture). Obviously the seller does not want the
inconvenience of insuring the goods once delivered, but must retain ownership of them as
security against not being paid. Agreement can sometimes be inferred
Stern v Vickers (1923)
The sellers had 200,000 gallons of white spirit in a tank belonging to a storage company.
They sold 120,000 gallons to the buyers, giving them a delivery warrant. The effect of the
warrant was that the storage company undertook to hold the white spirit subject to the
buyers order. The buyers sold on to a sub-purchaser who asked the storage company to
store it on his behalf, paying rent for storage. The spirit then deteriorated before it was
delivered.
Held -Although there was no agreement between the parties, express or implied, the risk
had passed from the original seller to the buyer even though property had not yet passed.
Emphasis was placed on the delivery warrant since once the buyers had it they were
immediately able to obtain delivery of the spirit. Because the reason why property did not
pass to the buyer was a deliberate decision by the buyer, the Courts view was that risk
should pass to the buyer even though they chose not to take immediate possession of the
goods.
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Delivery delayed through fault of one party

Risk is concerned only with accidental destruction or deterioration and thus does not extend
to cover damage to the goods caused by the fault of one of the parties in delaying delivery:
Demby Hamilton v Barden (1949)
The buyer was supposed to take delivery of some apple juice in weekly loads. The buyer
held up delivery and the juice went off as a result.
Held -The buyer must bear the loss.
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Bailee or custodier of the goods of the other party

S20(3) requires that any person in possession must take reasonable care of the goods even if
the ownership is with the other party. So if the goods are damaged or stolen because of his
negligence he will have to bear the loss even though at the time he was not the owner. So if
the sellers driver negligently crashes his delivery van this might render the seller liable for the
loss of the goods even though the buyer was now the owner of them.
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Special rules for the sale of an unidentified part of an identified bulk

The historical problems with S16 related to sales from an identified bulk. Bulk is defined in
S61 SGA
S61 SGA defines bulk as 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.
Property could not pass until the part sold had been physically separated or earmarked
(ascertained). Thus a buyer could find that although goods had been paid for he had no

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property/ownership rights in them because they were still unascertained. If the seller should
become insolvent before ascertainment the buyer would rank merely as an unsecured
creditor and typically recover nothing. The point is illustrated by the following case Re London Wine Co (Shippers) Ltd (1986) PCC 121
S sold wine to several buyers who paid for the wine, and also for S to store it. They each
received certificates of title although the wine remained stored as one bulk. S became
insolvent and the liquidator claimed the wine still belonged to the company.
Held -The liquidators claim was upheld, property remained with the company.

The question of what proprietary interest the buyer gets in the bulk before property passes
under Rule 5(3) and (4) is dealt with in the new S20A. To understand its impact it is necessary
to first consider an important pre-emptive case decision Re Staplylton Fletcher [1994] 2 BCLC 681
Customers bought and paid for wine but did not take delivery. The wine was moved from
the general stock area to the customer reserve but not marked as belonging to individual
customers. The seller became insolvent.
Held -Property in the wine had passed to the buyers by common intention, thus each buyer
was a tenant in common in proportion to their order.
This decision proved an important move towards recognising quasi-specific goods as
different from wholly unascertained goods. The thrust of the decision is in S20ASGA
S20A(1)

This section applies to a contract for the sale of a specified quantity of

unascertained goods if the following conditions are met -

(a)

the goods or some of them form part of a bulk which is identified either in the
contract or by subsequent agreement between the parties; and

(b)

the buyer has paid the price for some or all of the goods which are the
subject of the contract and which form part of the bulk

Under S20A property passes in a sale of a specified quantity of an identified bulk as soon as
the buyer pays the price.
Issues arising from S20A
S20A is subject to contrary agreement by the parties, either that it will not apply at all, or that
property will pass at some point after payment. For S20A to apply, the bulk must be identified
and fall within the statutory definition. Moreover the agreement must be for a specified
quantity (eg 20 tons) not a contract to purchase a fraction or percentage of the whole (these
now being specific goods). The tenancy in common subsists whilst the bulk remains. If only
the buyers goods are left he has complete property in the bulk by virtue of S18 Rule 5(3).
A final issue to consider is insufficient quantity in the bulk.The new Act considers the ways in
which such a situation could arise, and the effect. The Act creates the proportionate reduction
rule in S20A SGA:

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S20A(4)SGA Where the aggregate of the undivided shares of buyers in a bulk determined
under subsection (3) above would at any time exceed the whole of the bulk
at that time, the undivided share in the bulk of each buyer shall be
reduced proportionately so that the aggregate of the undivided shares is
equal to the whole bulk.

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Risk and undivided bulks

We have seen how a buyer can now acquire ownership rights in an identified bulk when he
pays for the goods. But when does risk pass? There is no express provision in the new Act
dealing with the transfer of risk. The accepted view is that risk remains with the seller until
actual delivery to the buyer i.e. not the earlier point when the buyer becomes a tenant in
common.
Key learning points

Property cannot pass in unascertained goods until ascertained S16

Ascertainment and appropriation may happen at the same time
Once ascertained property passes when goods are unconditionally appropriated or
ascertained by exhaustion S18 Rule 5
Buyer must assent to appropriation expressly or impliedly
Buyer who pays price of goods in identified bulk becomes tenant in common S20A
Risk passes with Property S20
General rule on risk can be displaced by contrary agreement, delay in delivery due to
fault of party, damage to goods when with carrier.
Risk does not pass when buyer in identified bulk acquires tenancy in common, only later
when goods unconditionally appropriated.