Article 1

The Nemo Dat Quod Non Habet Rule

Usually the sale of goods takes place between the buyer and either the owner of the
goods or by his authorised agent. However, there are some circumstances in which
a seller may purport to sell goods which he does not have any right to sell. In these
circumstances the law has to decide which of two innocent parties to favour: the
buyer or the original owner. It is at this stage that the nemo dat quod non habet rule
comes into play. This essay will consider the operation of this rule and whether the
exceptions to it offer an effective compromise to what would otherwise be a very
harsh rule.

In a typical case involving the nemo dat rule the seller (who is not the owner) will
have sold goods to an innocent third party and then will have disappeared or
become insolvent so that the two parties may not be able to seek a remedy from
him. Either the owner or the third party must suffer loss, and the court will have to
decide which. As Lord Justice Denning stated in Bishopsgate Motor Finance Corpn
Ltd v Transport Brakes Ltd.

In the development of our law, two principles have striven for mastery. The first is for
the protection of property: no one can give a better title than he himself possesses.
The second is the protection of commercial transactions: the person who takes in
good faith and for value without notice should get a good title. The first principle has
held sway for a long time, but it has been modified by the common law itself and by
statute so as to meet the needs of our own times.

The nemo dat rule is that the transferor of goods cannot pass a better title than he
himself possesses. The rule represents the common laws traditional favour of the
preservation of property rights. The rule is now stated in section 21(1) of the Sale of
Goods Act as:

Subject to this Act, where goods are sold by a person who is not their owner, and
who does not sell them under the authority or with the consent of the owner, the
buyer acquires no better title to the goods than the seller had, unless the owner of
the goods is by his conduct precluded from denying the sellers authority to sell.

The rule can be demonstrated by the case of Greenwood v Bennett. In this case the
original owner of a Jaguar car (Bennett) entrusted it to a man named Searle for
repairs to be carried out. Searle then used the car for his own purposes, crashed it
and caused extensive damage. Searle then sold the car to Harper, who owned a
garage, for 75. Harper did not realise that Searle was not the owner of the car.
Harper then spent 226 repairing the car and sold it on to a finance company. It was
held by the court that the car belonged to Bennett as Searle did not have title and
could therefore not transfer that title to Harper. For the same reason, Harper could
not transfer title to the finance company. Bennett was therefore able to recover the
car but had to compensate Harper for the work done to it.
However, although the nemo dat rule in its essential form may be clear, it is not
always fair, as it is an innocent party buyer who will suffer, and nor is it necessarily in
keeping with the needs of modern commerce and trade. Where goods are in
question the buyer may be in a very difficult position. The owner, in voluntarily parting
with the possession of the goods, takes upon himself the risk that something might
happen to the goods. The owner is in a position to check for himself the
creditworthiness of the person to whom he gives possession of the goods and there
is an argument that if the owners trust is in fact ill-founded then he ought not to put
the consequences of his own mistaken judgment on to the shoulders of the innocent
purchaser. [7] There is no way that the buyer can effectively investigate the title to
chattels and if the goods are to move freely in the distribution chain then it is
important that buyers are confident in their purchases. Furthermore, goods may be
perishable and there is a need for them to be dealt with quickly and efficiently.

Because of the apparent harshness of the nemo dat rule, several exceptions to it
were developed at common law and also have been added by statute. All of the
exceptions will apply only in favour of a person who acquires the goods in good faith
and without notice of the rights of the original owner. The common law exceptions
are around agency arrangements, estoppel and (previously) market overt.

In relation to agency, where the owner has, by his conduct, held out the agent as
having authority to sell to the buyer, the owner is precluded from later denying that
authority. This will only be the case where an actual sale to the buyer has taken
place, and not merely an agreement to sell. Apparent authority will give rise to an
exception to the nemo dat rule, but the mere appearance of authority will not. It is
therefore necessary to establish the rather limited cases in which apparent authority
will exist. In considering whether the third party can successfully invoke apparent
authority, five factors are relevant: the status of the agent; the capacity in which he
was instructed to act; whether he was given possession of the goods or indicia of
title to them; the capacity and manner in which he in fact acted; and, whether the
buyer acted in good faith and in the reasonable belief that the agent was authorised
to sell.

The status of the agent will be relevant because only professional agents will attract
apparent authority for the purposes of the exception to the nemo dat rule. Where the
agent is a mercantile agent and is instructed as such by the owner, then the buyer is
entitled to assume that the agents authority extends to all acts which would usually
be performed by an agent in that agents position. Thus, the owner takes on a risk of
the agent exceeding his authority by entrusting his business to a professional agent.
However, where the owner did not instruct the mercantile agent to act in his capacity
as mercantile agent, but for some other purpose, the owner will not be bound by a
transaction and the nemo dat rule will apply. Clearly, the buyer in these two
circumstances is in exactly the same position in terms of knowledge and expectation,
but in a completely different position in terms of the application of nemo dat. This
would appear to be unfair and is an example of the inconsistency of the exceptions
to the nemo dat rule.

Where the agent in question is not a mercantile agent, the common law exception to
the nemo dat rule will not apply at all, and it will be the buyer who is taken to have
accepted the risk. Thus, in Jerome v Bentley & Co the plaintiff had entrusted a
diamond ring to a man named Tatham to sell for 550. Tatham was to keep anything
in excess of 550 but was to return it if not sold within seven days. Tatham sold the
ring after eleven days for 175 and represented himself to the defendants as the
owner. The defendants then resold the ring. The defendants were held not to be able
to rely on usual authority because Tatham belonged to no well-known class of agent
but was merely an individual entrusted with the sale of the ring. Tathams authority
had expired after seven days and the defendants were not entitled to assume that he
had authority.

The other form of agency exception at common law to the nemo dat rule is the
situation where the owner holds out the agent as being himself the owner. In these
circumstances the owner cannot claim not to be bound by the disposition unless the
buyer did not act in good faith or in the belief that the agent was in fact the owner.

Section 21 of the Sale of Goods Act 1979 also preserves the common law exception
of estoppel, as it provides that the nemo dat rule applies unless the owner of the
goods is by his conduct precluded from denying the sellers authority to sell. As well
as covering the agency agreements expolained above, this also covers other forms
of representation made by the owner. For example, in Eastern Distributors Ltd v
Goldring the owner of a van wished to raise a loan on it and got together with a
motor trader to deceive the finance company. They each filled in the forms as if the
van belonged to the trader and as if the customer (the owner) wished to acquire the
van on hire purchase. The finance company then bought the van from the trader and
transferred it to the customer on hire purchase. The customer then sold the van to a
third party. On discovering the fraud the finance company sought ownership of the
van. The customer had maintained possession of the goods, which will be seen in
the following section on statutory exceptions is important, but had lost his ownership
to the finance company on the basis of estoppel.

There has, from time to time, been a suggestion that another exception to the nemo
dat should exist at common law: estoppel by negligence. However, it is clear that
such a claim will very rarely, if ever, succeed. The exception is based on a rule that
the owner must not be so negligent in dealing with his own property so as to facilitate
the sellers fraud that he is the owner. Yet, in Moorgate Mercantile Co v
Twitchings the House of Lords held that inactivity on the part of the owner in relation
to safeguarding his property, for example by failing to register a hire-purchase
agreement, would not estop that owner from asserting his rights.

The statutory exceptions to the nemo dat rule are contained in the Factors Act 1889,
the Sale of Goods Act 1979 and the Hire-Purchase Act 1964. Until 1995 the Sale of
Goods Act provided an exception in the form of the market overt rule which provided
that where the buyer bought the goods in market overt in good faith he was entitled
to take good title to them. However, the rule was developed at a time when most
goods were sold at markets and private sales were discouraged as likely to involve
stolen goods. In modern times the market overt rule became perceived as aiding
thieves and fences and has now been abolished.

The first remaining statutory exception to the nemo dat rule is provided by section 23
of the Sale of Goods Act 1979. This provides that where the seller of goods has a
voidable title which has not been avoided at the time of sale the buyer will acquire
good title to them.

Another, important exception is provide by section 2 of the Factors Act 1889, which
states: Where a mercantile agent is, with the consent of the owner, in possession of
goods or of the documents of title to the goods, any sale, pledge or other disposition
of the goods, made by him when acting in the ordinary course of business of a
mercantile agent, shall, subject to the provisions of this Act, be as valid as if he were
expressly authorised by the owner of the goods to make the same; provided that the
person taking under the disposition acts in good faith, and has not at the time of the
disposition notice that the person making the disposition has not authority to make
the same.

Thus, where the conditions of that section are met the rule laid down in Jerome v
Bentley (above) is reversed. For the purposes of this section a mercantile agent is
an independent agent acting in a way of business to whom the owner entrusts goods
and confers authority to sell etc. This means that any professional agent who has
been given possession of goods for some purpose connected with the sale will be
able to pass good title to the buyer. Similarly, where the owner gives possession of
goods to another person for the purpose of consignment or sale the consignee will
be able to treat the goods as belonging to that other person.

In some cases the seller may sell goods to one buyer and then, having retained
possession of the goods, seek to sell them to another buyer. Section 24 of the Sale
of Goods Act 1979 provides an exception to the nemo dat rule in these
circumstances, as does the slightly wider section 8 of the Factors Act 1889. The
section applies where the seller has already sold goods, rather than where the first
disposition is an agreement to sell. It also applies only where the goods or
documents of title are actually delivered or transferred to the second buyer. The
exception provides that in these circumstances it will be the second buyer who
obtains ownership of the goods.

There is also an exception to the nemo dat rule where the buyer is in possession of
the goods and resells them to a second buyer. Section 25 of the Sale of Goods Act
and the slightly wider Section 9 of the Factors Act 1889 provide that where the buyer
has bought or agreed to buy goods and takes possession of the with the consent of
the seller then the disposition of the goods to a third party, second buyer, who acts in
good faith, will take title to the goods. Thus, this section is relevant where the buyer
agrees to buy goods but title to them has not yet passed to him and he sells them to
a second buyer, who will then take good title. This is particularly important in
circumstances of conditional sale where the seller retains title until the buyer has
paid for them. However, it is narrow in that it will only apply where the fist buyer has
bought or agreed to buy, and not for example hired, has the consent of the seller to
be in possession, is in actual possession, and has actually delivered or transferred
the goods to the second buyer. These conditions have led one commentator to
conclude that: As with other statutory exceptions to the nemo dat rule, the courts
have consistently taken the view that s.9 [of the Factors Act 1889] must be strictly
construed. This has resulted in such a restrictive and literal interpretation of s.9 that it
has become extraordinarily difficult for any innocent party to bring himself within its
provisions.
The final statutory exception to the nemo dat rule is provided by Section 27(1) of the
Hire Purchase Act 1964, which provides that where a motor vehicle which is held
under a hire purchase agreement is sold by the hirer before he has obtained title to
it, the first private purchaser of the vehicle will take good title. However, the
exception is very restricted in scope. Firstly, the section only applies to motor
vehicles. Secondly, the purchaser must be a private purchaser, and not a dealer or
even a person simply seeking to make a profit on resale. Most importantly, the seller
must be someone who is hiring the vehicle under a hire purchase agreement or
buying it under a conditional sale agreement. Thus, in Shogun Finance v Hudson a
rogue took possession of a car under hire purchase terms using a stolen driving
licence and then sold the vehicle to an innocent third party before disappearing. As
the original contract was void for mistake the rogue was not a person hiring under a
hire-purchase agreement and the buyer was unable to rely on the exception to the
nemo dat rule.

The nemo dat rule, without the exceptions listed above, would be a very harsh rule
indeed, as it would always punish the innocent third party and never the owner,
despite any fault on the part of the owner. The exceptions should therefore be
welcomed. However, the nemo dat rule will often leave innocent third parties without
redress unless they can fit themselves precisely within one of the specific and
narrow exceptions. The exceptions are piecemeal and may be described as
confused. Furthermore, it has been stated that the statutory exceptions have been
so drafted and interpreted as to make their application depend not on principles of
equity or justice but on fine technicalities which have little rhyme and less reason.
For these reasons, it has sometimes been suggested that the area of law requires
reform.

One solution suggested by Devlin LJ in Ingram v Little is for apportionment of loss

between the owner and the purchaser. However, this would be difficult where goods
have passed through several hands. An alternative, and perhaps more workable,
solution is to replace the existing nemo dat rule and its exceptions with a principle of
fairness. This would allow the courts to settle disputes relating to ownership with
reference to this principle which could be supported by statutory guidelines. The
court would then be able to grant title to the person who in its eyes it was more
equitable to do so and could take into account factors such as general commercial
fairness, the appropriate bearing of risk, the opportunity for the parties to verify the
credentials of the fraudulent party, the business or private capacity of the parties, the
ability to insure, and the bona fides of the parties. A power of apportionment could
also be give.

In conclusion, although the exceptions do go some way to limiting the harshness of

the nemo dat rule, there is a need for further reform in the area to ensure that
conflicts between owners and purchasers are resolved fairly.
 There are exceptions to this nemo dat quod non habet rule at the rights of
the buyer in the event of failure by the seller to transfer title.The first exception
for nemo dat rule is estoppel. Under section 27 of Sale of Good Acts, estoppel
may arise when the owner of the goods is by his conduct precluded from
denying the sellers authority to sell. The owner of goods by his conduct makes it
appear to a buyer that the person who sells the goods has his authority to do so
and the buyer acts in assurance of it. The owner will be estoped from denying
the sellers authority. The buyer who takes in good faith and for value will acquire
a good title by estoppels.The principle of estoppels may be illustrated in the
decision of a New Zealand case N.Z.Securities & Finance Ltd v Wrightcars Ltd
[1925] 1 NZLR 77. The owner in that case was held to be prevented from
denying the seller authority to sell to a third party. In that case, A agreed to sell a
car to B and B was given possession of the car upon the tender of a cheque as
payment. It was agreed that property in the car was not to pass until the price
had been received. B then sold the car to C, and took it back on a least.
However, before the sale to C was finalize, C had contacted As office and
response to Cs query was informed by As employee that B had paid for the car.
The cheque given to A by B was dishonored whereupon A repossessed the car.
On discovery of the events that had occurred, C sued A for conversion relying on
the New Zealandequivalent to Section 27. C was successful in claiming that A
was precluded by his conduct from denying Bs authority to sell so that title had
passed to C.

Second exception of general rule can be seen in the term sale by

mercantile agent. UnderSection 27, Sale of Goods Act 1957 provides that where
a mercantile agent is in possession of the goods or of a document of title to the
goods, any sale made by him when acting in the ordinary course of business of a
mercantile agent shall be valid as if he were expressly authorized by the owner
of the goods to make the same with the consent of the owner. However, if the
buyer has acted in good faith and at the time of the contract of sale had not
received notice that the seller has no authority to sell. A mercantile agent has
been defined in section 2 of the Sale of Goods Act 1957 as a mercantile agent
having in the customary course of business as such agent authority either to sell
goods, or to transfer goods for the purpose of sale, or to buy goods ,or raise
money on the security of goods.

Examples of a mercantile agent would be a second-hand, automobiles

dealer, a broker, or an auctioneer.In English case, Folkes v King , Folkes left his
car with a mercantile agent and told him not to sell it below a certain price. The
agent sold the car for less than the minimum price to the King who purchased
the car in good faith and for valuable consideration, without any notice of any
fraud. The agent then disappears with the money. Folkes sued to recover his car
from the King.The issue was whether the King received good titles. Held that, as
the mercantile agent was in a possession of the car with the consent of the
owner for the purpose of sale, and as the sales has been in the ordinary course
of the agents business, the purchaser received a good title.Folkes therefore,
could recover the car from King. The following illustrates the operation of the
provision to section 27, Sale of Goods Act1957, Nina hands over her car and
registration book to her boyfriend Muthu, a second- handdealer car, for
safekeeping. Muthu then sells Ninas car to Ali who buys in good faith,without
knowledge or notice of Muthus lack of authority. Thus, Ali obtains title to the car.