§ 8.30 p.m.
§ Lord Mustill
My Lords, I beg to move that this Bill be now read a second time. As its title demonstrates, the subject matter of the Bill is one aspect of the law relating to the sale of goods, which is partially codified in a series of enactments culminating in the Sale of Goods Act 1979.
The problem which the Bill is designed to remedy has long been recognised both by lawyers and those engaged in commerce as a potential source of injustice. Fortunately, the English and Scottish Law Commissions have been able to analyse the problem, suggest a solution, canvass opinions and propose a form of language by which a solution might be embodied in legislation.
I suggest that the Bill provides a very cogent illustration of the way in which, acting, as it were, in tandem, it is possible for the Law Commissions and your Lordships, if 1454 so minded, to examine in depth a legal problem and to make a valuable practical advance without excessive expenditure of parliamentary time.
It may be helpful to begin with the background and nature of the problem. This part of the law is concerned with the passing of property under an agreement for the sale of goods in circumstances where the buyer has paid the price in advance. The later in time that the property and the goods —that is, the ownership of them—is transferred to the buyer, the greater the risk to which he is exposed. If he has the property and the goods, he can in general deal with them as his own to the exclusion of the rights of others, even if they have not yet come physically into his possession.
That is of most particular importance when the seller of the goods becomes insolvent since, if the property and goods are not passed to the buyer, they form part of the seller's general assets and fall into the hands of the receiver or liquidator for distribution among the creditors as a whole. The buyer is left with no goods and no price, and nothing else but a dividend in the winding-up of the vendor, which may be useless.
Broadly speaking and trying to leave jargon and technicalities aside, there are three situations in which the property and the goods may pass. The first is where the goods are identified conclusively at the time of the contract. In that situation, the goods may be single items or several and may be separate or in bulk. For example, we may find a buyer saying, "I will buy that bottle of wine. I will buy the Ford motor car with registration no. XYZ 123. I will buy all the wine in your cellar. I will buy all the grain in the holds of the vessel 'Challenger'." In such cases, Section 17(1) of the Act prescribes that the property is transferred to the buyer when the parties to the contract intend it to be transferred and by virtue of Section 18, Rule 1 of the Act, that will very often be at the time when the contract of sale is made. Therefore, the pre-paying buyer is safe. Even though the goods have not been delivered, they belong to him, and he is protected against the seller's insolvency.
Secondly, at the other extreme, there is the case where the goods are not identified at all except by their description. For example, a buyer says, "I will buy from you 200 standards of good Lithuanian pitch pine", or, "I will buy from you 200 bottles of Beaujolais Villages 1992", and so on. The seller is free to deliver any goods from any source so long as they comply with the description. Here, it is a matter of common sense as well as law that the buyer cannot become the owner of the goods at once since nobody can own something when it is impossible to know what he owns and there is no means of finding out.
Under English law, it is not until identified goods are "appropriated" to the contract that property can pass under a contract of that kind. Until then the pre-paying buyer has no protection and it does not matter what the parties intend. They cannot achieve the impossible. That rule is embodied in Section 16 of the Act.
The third situation, with which this Bill is concerned, is midway between the two extremes. The goods are identified by the contract to the extent that they must come from a fixed and prescribed source—a group of items or a bulk of homogenous goods. The contract does not say 1455 which particular items or which part of the bulk is to be the subject matter of the sale. For example, a buyer says, "I will buy 200 of the bottles of 1992 Beaujolais Villages now in your cellar. I will buy 100 of your sheep now on your farm at Blackacre. I will buy 1,000 tonnes out of the cargo of grain in the holds of the ship 'Challenger'." The vendor's freedom of action is constrained to the extent that he cannot deliver goods from any other than the prescribed source and everyone can tell what that source will be.
But common sense once again dictates that the property in full cannot pass at once. You can look at the field full of sheep and know that among them are the 100 sheep which, when they have been separated, will belong to the buyer. So also will the bottles of wine in the cellar. But until the sheep or the bottles are separated, there is no means of knowing whether a particular sheep in the field or a particular bottle in the cellar has or has not been sold to the buyer. It is that last situation with which the Bill is solely concerned. The proposed legislation has nothing to do with the second situation where the goods are entirely unascertained at the time of the sale.
The Bill sets out to deal with the third situation in two ways. First, it gives statutory force to the existing doctrine of ascertainment by exhaustion. That is only a high-flown way of describing a situation where the stock from which the goods are to be drawn is depleted successively by withdrawals until no more is left than is needed to satisfy the contract of sale in question. So in the case of the 200 bottles of wine sold from the cellar, if the vendor separates and takes away, either for his own use or for delivery for someone else, so many bottles that there are only 200 left, at that moment it becomes possible to say that those bottles must be uniquely the subject matter of the sale.
The common law has long recognised that when that happens, there is no longer any reason why the ownership in them should not then pass to the buyer, if that is what the parties intend. One of the purposes of the Bill is simply to insert that existing piece of common law into the current statutory framework.
By contrast, the second function of the Bill is to introduce a wholly new concept; namely, that on the payment of the whole or part of the purchase price, the buyer becomes a co-owner with others having a claim upon the entire bulk. He still does not own any particular items or any particular part of the bulk but he is able to acquire an immediate undivided share.
That interest as co-owner will prevail in an insolvency and give protection to commercial and private buyers alike. Thus it happens often that persons dealing in commodities will contract to purchase a part of a bulk consignment of goods shipped from overseas. As the law at present stands —and it is a source of resentment to many of our trading partners—a buyer who has agreed to purchase 1,000 tonnes of grain shipped on board a particular vessel will not obtain any proprietary interest in them when the goods are shipped, or when the bill of lading for 1,0000 tonnes is delivered to him, or when he has paid for the goods. He will have to wait until the ship has arrived, the goods have been discharged into warehouse, and his particular portion has become identified, either by his taking physical delivery of it or by the process of exhaustion, which I described. That puts the 1456 buyer at an undesirable disadvantage, both in the case of insolvencies and where certain ancillary rights—such as the right to claim damages in respect of injury to the goods—depends upon his possessing a proprietary interest, The purpose of the new statutory provision is to give the buyer an immediate interest by way of co-ownership from the moment when the bulk of the goods can be identified. A similar benefit will accrue to a private individual who contracts to purchase one or more items out of an identified stock—the bottles out of the cellar—and makes full or partial payment in advance.
Those are the general purposes of the Bill. I can deal quite briefly with the individual provisions. Clause 1 introduces the principal reform. Clause 1(1) provides for the insertion of the words "Subject to section 20A below" at the beginning of Section 16, which, as I said, is the section which provides that the property cannot pass until the goods are ascertained. Apart from the amendment made by Clause 1(1), Section 16 remains in its present form since, for the reasons I gave, the passing of property in unascertained goods is impossible. Moreover, as the purpose of the Bill is to protect the buyer who has paid for the goods before delivery and who may lose both the goods and the price, it will not apply where there is no prepayment.
Clause 1(2) adds a new rule to those presently found in Section 18, recognising the doctrine of "ascertainment by exhaustion". The rule cannot, by its very nature, be applied in cases where the bulk from which the goods are to be taken is never agreed upon by the parties. If one looks at the wording, it can be seen that the new rule is separated into two paragraphs, numbered (3) and (4). Each achieves the same result but the latter paragraph deals with the position of the buyer who has entered into a number of contracts for specified quantities of goods from the identified bulk while the former deals with the buyer who has entered into only one contract. I would add that the new rule will only apply in cases where evidence of the different intention does not appear from the terms of the contract, the conduct of the parties or the circumstances of the case.
Clause 1(3) introduces Sections 20A and 20B to the 1979 Act. It is Section 20A that will enable a buyer to acquire an undivided share in an identified bulk when he contracts to purchase and pay for a specified amount of unascertained goods which form part of the bulk. Section 20A(1) makes clear that the contract must be one for the sale of a specified quantity of unascertained goods. That does not include a contract for the sale of a fraction or percentage of goods. Paragraphs (a) and (b) make it clear that at least part of the goods supplied under the contract must form part of an identified bulk. Paragraph (b) also makes clear that the buyer must have paid at least part of the purchase price for the goods. As soon as the bulk is identified and part of the purchase price paid, Section 20A(2) provides that,an undivided share in the bulk is transferred to the buyer",who becomes an "owner in common" of the bulk. Once again, it is made clear that the parties may contract out of the new rule or provide for property in an undivided share to pass at a later stage. The choice is their own.
1457 There are, subsequent to those provisions, certain technical matters of mechanism with which I think, at this late hour, I need not trouble your Lordships in detail. So much for Clause 1 of the main reform.
Clauses 2 and 3 are also concerned with mechanics. Clause 2 introduces a number of additional definitions; for example, a definition of "bulk" and of "delivery". I believe that they speak for themselves.
Then there is a provision concerning the situation where the contract relates to an unsevered share in identified goods, for example, a third share in a yacht. Clause 2 extends the definition of "goods" so as to ensure that a sale on those terms is a sale of goods for the purposes of the Act. As can be seen, Clause 3 contains the short title and commencement provisions of the Bill.
It may appear a dry, technical little piece of academic law reform; but it is not so at all. I respectfully submit to your Lordships that it achieves a valuable, although narrow, commercial purpose. I hope that I have said enough to explain the purpose of the Bill and the simple means adopted to achieve it. I commend the Bill to the House.
§ Moved, That the Bill be now read a second time.—(Lord Mustill.)
§ 8.45 p.m.
§ Lord Steyn
My Lords, I ask for your indulgence for a few diffident remarks on the wider commercial context in which the proposed amendment to the Sale of Goods Act ought to be seen. The amendment proposed by my noble and learned friend Lord Mustill, if passed, will rationalise our trade law in one important area for the benefit of the trading community. I support the amendment. But I should like to go further. It is important that our trade law should in all respects be flexible, attuned to the needs of commerce and responsive to major developments in the international market place.
Our trade law ought to be structured so that our traders are at the very least at no disadvantage and, one hopes, in the best possible position to compete in international markets for sale of goods and services. I am conscious that for a Law Lord to invoke the real world may seem a little incongruous. Indeed, I am reminded of the Law Lord, sitting at a High Table in Oxford, who complained that the press said that he lived in an ivory tower. His response was: "That's nonsense; I go foxhunting every Sunday with ordinary people". Nevertheless, I will attempt to illustrate the broader theme by reference to two other important trade law projects, one very much on the rails and the other, apparently, in a long slumber.
The first project is the new Arbitration Bill. Our existing legislation is of poor quality. It is also inflexible and based on the false premise that arbitration should be modelled on court procedures. I mention three points. The orthodox view is still that arbitrators are bound by the technicalities of the hearsay rule, despite the fact that that rule is now utterly discredited even in civil legal proceedings. Secondly, the received wisdom is still that arbitrators must conduct arbitrations in the adversarial and time-consuming fashion of the courts. That is why arbitrations in this country last much longer than they do 1458 on the Continent. Relying on some experience at the coal face in the Commercial Court, I would say that it is in the public interest that arbitrators should be freed from such technical constraints.
Thirdly, I venture to suggest that, subject to considerations of public policy, businessmen should be allowed to resolve their differences by such procedures as they think fit—whether it be by conciliation, mediation, alternative dispute resolution, arbitration in accordance with the good conscience of the arbitrator or arbitration in accordance with the strict legal rights of the parties. Unfortunately, English law does not at present appear to permit parties to agree on arbitration in accordance with the sense of fairness of the arbitrator. I ask rhetorically, what justification is there for so restricting our businessmen in regard to dispute resolution?
International commercial arbitration is an important subject. It provides a neutral and effective means of dispute resolution. Without it, businessmen would often hesitate to embark on the commercial and political risks in international business transactions. International commercial arbitration facilitates trade. Such arbitrations are also a very significant contributor to the invisible earnings of the City of London.
London is still pre-eminent in that field. But there is no reason to be complacent. The competition for the work is intensifying. It is, therefore, essential that our arbitration law should be rationalised, rendered more flexible and be stated in a readily accessible form. Fortunately, the signs are propitious. A new Arbitration Bill is in an advanced state of preparation. It is being drafted under the supervision of the Department of Industry and Trade and the Departmental Advisory Committee on Arbitration Law, now headed by Lord Justice Saville. My understanding is that it might he possible to find parliamentary time for the Arbitration Bill later this year. As it ought to be an uncontroversial measure, I would hope that our trading community will not be disappointed by delay. There is a strong case for early legislation.
The second project is the United Nations Convention on Contracts for the International Sale of Goods 1980, commonly called the Vienna Sales Convention. It was a project of the United Nations Commission on International Trade Law (UNCITRAL). The convention has nothing to do with international politics: it has everything to do with the promotion of trade. The United Kingdom played a full and constructive role in the drafting sessions and final formulation of the convention. In 1980 the convention was adopted by 60 nations. In 1988 it came into force. Forty-four nations have so far ratified the convention. Those nations include almost all members of the European Community, many Commonwealth countries, including Australia and New Zealand, and the United States. An estimate from UNCITRAL suggests that already one-half of world trade is conducted on the terms of the Vienna Sales Convention. That role of the convention is bound to grow and grow.
What has the response of the United Kingdom been? In 1989 the Department of Trade and Industry issued a consultative document on the Vienna Sales Convention. In response, the Law Commission recommended that the United Kingdom should ratify the convention. To date there has been no official announcement.
1459 Your Lordships may think that the right question to ask is: Is it in the best interests of the United Kingdom as a trading nation to ratify the Vienna Sales Convention? If Britannia still ruled the waves, and if our traders could regularly impose English law as the applicable law in international transactions, there would be no pressing need to ratify the convention. But the international marketplace for the sale of goods has changed. For every such transaction in respect of which an English trader is able to insist on English law as the applicable law, there will he one or more where the English trader has to concede the applicability of a foreign legal system. That is particularly the case with the great many foreign state trading corporations.
In many parts of the world national sales regimes are little more than embryonic or skeletal. Exposure to such systems is a substantial business hazard. The Vienna Sales Convention is usually an attractive alternative for both parties. It has the badge of neutrality. Even foreign state trading corporations readily contract subject to such terms. And, if we ratify, those traders who wish to insist on the applicability of English law will be entitled, of course, to contract out.
At present our traders are at a disadvantage in international transactions relating to the sale of goods. Our trade law has fallen behind. It is not sufficiently attuned to the needs of commerce. We have not responded swiftly enough to developments in the international marketplace. It seems to me that the case is made out for an official announcement that the United Kingdom will ratify the convention. In such matters an open mind is a good thing, but it must be capable of eventually shutting.
I have trespassed on your Lordships' time. I leave this subject by reminding your Lordships of what happened to another inept speaker. It was 70 years ago. The scene was a Law Society dinner in Liverpool. The principle guest was the great F. E. Smith. The president of the Law Society spoke. His speech was long; it was also boring. When the speaker sat down he said to F. E. Smith, "How would you have done it?" F. E. Smith replied, "Under an assumed name".
§ 8.54 p.m.
§ Lord Clinton-Davis
My Lords, in this short debate we have had the benefit tonight of hearing two distinguished lawyers. I will come to the noble and learned Lord, Lord Steyn, later in my remarks. First of all I want to say that I very much welcome the Bill. I congratulate the noble and learned Lord, Lord Mustill, in taking up this important issue which is aimed at redressing a serious anomaly in the law, as set out in Section 16 of the Sale of Goods Act 1979. He has delivered a powerful rationale for introducing this Bill and he has given a clear exposition of the detail as well as the purpose of the Bill. I think that not only we in this House but also those outside will in due course of time be grateful for that.
I do not think that any repetition from me of the arguments in favour of the Bill will improve the situation, notably at this fairly late hour. However, I should like to say that it is patently absurd in the circumstances that were described by the noble and learned Lord that a person may have paid for goods and received a document which seems to give him title to those goods and then finds 1460 himself in a position—I stress, in those particular circumstances—of having no title to those goods at all. That is an issue which is particularly germane as regards insolvency. Both the noble and learned Lords were right in saying that this is not an arcane proposition. It emerges from an anomaly in the law. It is something that is practical and important and I hope that this Bill will be given a good passage and will be enacted soon.
Of course it was the noble and learned Lord himself, I think, in the case of Re Goldcorp Exchange Ltd. last year in the Judicial Committee of the Privy Council who gave advice which effectively resulted in this Bill—apart from, of course, the work of the Law Commission—coming before your Lordships' House tonight. In that case he described the difficulty of dealing with the passing of property in unascertained goods which, of course, is the purpose that we are considering tonight.
The second merit of this debate has been that we have heard the noble and learned Lord, Lord Steyn, who has chosen the Second Reading of this Bill to make his maiden speech. I hope that he will make many speeches in this House on future occasions. He, of course, has had an extraordinarily distinguished legal career, not simply in this country but earlier in South Africa during times which were extremely sad in that then troubled country. He chose to settle in this country. He commenced practice at the Bar in 1973. He was elevated to Silk in 1979 and became a High Court judge in 1985, a Lord Justice of Appeal in 1992 and a Law Lord earlier this year. I venture to suggest that South Africa's loss has certainly been this country's great gain, He seemed to cast doubt upon whether it was possible for a Member of your Lordships' House who is a Law Lord to live in the real world, but I think he is proof that he very much does.
The comments that the noble and learned Lord made—they were stimulating comments, if I may say so—on wider reform proposals than specifically relating to this Bill, were welcome. He spoke of the need for ratification by the United Kingdom of the United Nations Convention on Contracts for the International Sale of Goods, 1980. It was a powerful plea for ratification and I hope that the Minister will be able to say something about that tonight. Time marches on and it is important that we ratify at an early stage. He also spoke powerfully about the merits of commercial arbitration and welcomed the possibility—I rather gathered a probability—of an arbitration Bill later this year.
This country must never forget that it is a trading nation first and foremost. Its laws affecting trade must always be kept under close scrutiny. I believe that the Bill will take a small but valuable step to keep our law on sale of goods up-to-date and fair. But the Bill does not mean that our vigilance to maintain our laws fully in line with commercial expectation so as best to promote trade with our country can be relaxed. In my judgment, we shall be fortunate to have the benefit of the views of lawyers, and judges of the eminence of the 1461 noble and learned Lords, Lord Mustill and Lord Steyn, to help us on these topics. I give absolutely unqualified support for the Bill from these Benches.
§ 9 p.m.
§ Lord Inglewood
My Lords, I should like to begin by thanking the noble and learned Lord, Lord Mustill, for his accomplished introduction of the Bill. The ensuing debate has, of course, been embellished by the maiden speech of the noble and learned Lord, Lord Steyn. Although as an undistinguished member of Lincoln's Inn I feel it a trifle incongruous, I speak for all noble Lords when I say that we much look forward to the noble and learned Lord's contributions in future.
The Government wholeheartedly welcome and support the Bill and hope for its early enactment. As the noble and learned Lord indicated, it represents the fruits of extensive work undertaken by the English and Scottish Law Commissions. The commissions have consulted widely on the issues which are dealt with by the Bill. They initially consulted generally on the law relating to the rights to goods in bulk and then undertook a subsequent consultation exercise with insolvency experts and other interested parties on the insolvency aspects of any scheme for the reform of Section 16.
The result of those extensive consultations has been the production of a most worthwhile piece of law reform which will remove what the Law Commissions called "the dangers of the existing law". Those dangers have been excellently explained by the noble and learned Lord, Lord Mustill, and there is little I wish to add.
As all speakers have pointed out, the amendments which the Bill will achieve will be welcomed by traders around the world and should enhance the position of English law, increasing its use as the law chosen to govern commercial contracts. It is, however, worth emphasising that the Bill will not only assist commercial traders. It will have implications for those consumers who are unfortunate enough to find themselves in the position of purchasing goods for a seller who becomes insolvent prior to the delivery of the goods. For example, to use an instance which may be close to the hearts of many noble Lords, an individual may agree to purchase a number of bottles of wine from a wine merchant. He may pay for that wine but delay collecting it or having it delivered, instead requesting the wine merchant to keep it for him in his cellar. If the wine merchant becomes insolvent before the wine's collection or delivery, the purchaser will under the present law lose both his wine and the money he has paid if his wine cannot be ascertained, which will be the case if the bottles are stored in the cellar with other bottles of the same wine. The Bill's provisions will mean that in such circumstances the buyer will in future have a proprietary interest which he can enforce.
As the noble and learned Lord, Lord Mustill, noted, there are two general points relating to the scope of the reform. First, the Bill does not deal with wholly unidentified goods. This includes goods which are part of a seller's general stock. In so far as such goods are concerned, the provisions of the Act as it presently stands will continue to apply. As the Law Commissions explain in their report, it is clearly necessary that the goods should 1462 form part of an identified bulk. Property cannot pass in wholly unascertained goods and the Bill strikes an acceptable balance in this area. Secondly, the reform is confined to a buyer who has paid for goods prior to delivery. Again, this is a sensible way to proceed. The amendment will be sufficient to remedy the injustice for a prepaying buyer who loses both his money and the goods for which he has paid. Where a buyer has not paid for goods prior to their delivery, the existing law will continue to apply. In such a case there is no injustice to be remedied in the present workings of the law.
The noble and learned Lord, Lord Steyn, raised some points about the arbitration Bill. The Government certainly recognise the importance of improving the law on commercial arbitration to make it more user friendly and acceptable to the business community. User friendliness is of key importance for both domestic and international arbitrations governed by English law. Her Majesty's Government well appreciate that the future international competitiveness of the arbitration industry—a major earner of invisible exports—is at stake. The Department of Trade and Industry, assisted by its departmental advisory committee on arbitration law, is making good progress on a new Bill. Her Majesty's Government recognise the contribution which the noble and learned Lord made as the immediate past chairman of the committee taking this work forward. I can confirm that the Government are committed to introducing the Bill as soon as parliamentary time permits.
§ Lord Clinton-Davis
My Lords, before the noble Lord continues, I should like to challenge him about that. There is an overwhelming case on this issue. It is not a Bill which will he challenged, in my respectful submission. The noble and learned Lord made a powerful case, for pragmatic reasons, for early enactment of the legislation. Why do the Government wait? There is surely no problem about it?
§ Lord Inglewood
My Lords, the case which has been made is one which the Department of Trade and Industry fully recognises. But it would be improper of me to identify to the House an issue which had not been finally determined. However, noble Lords can rest assured that this is a matter on which we are progressing with all the vigour that we can.
The noble and learned Lord also referred to the Vienna Sale of Goods Convention and possible ratification. I can confirm that Her Majesty's Government continue to take an active part in the business of the convention. We shall look most carefully at the reasons which the noble and learned Lord has advanced this evening and bear them in mind in forming our future plans.
Hearing the noble and learned Lord, Lord Mustill, explain the present implications of Section 16 of the 1979 Act, one may wonder why there have been no previous attempts to change the existing position. I think that the stumbling block has always been the vexed question of the division of assets in the event of an insolvency or liquidation. The solution which the Law Commissions propose is, however, one which has the support of interested parties and, it is agreed, strikes an acceptable balance between competing interests.
1463 This Bill is non-controversial. The policy and balance contained in it have obtained the support of commercial parties and I commend the work of the two Law Commissions which has resulted in the Bill which is now before us. I also thank the noble and learned Lord, Lord Mustill, the noble and learned Lord, Lord Steyn, and other noble Lords, for taking it forward. I trust that with your Lordships' agreement we shall be able to speed this Bill on its way to the statute book.
§ Lord Mustill
My Lords, I am most grateful to noble Lords for their comments on the Bill. I am particularly grateful to the noble Lord, Lord Inglewood, for expressing the support of the Government for it. It is valuable work and the support of the Government is most heartening to our trading community. The gracious observations of the noble Lord, Lord Clinton-Davis, are most welcome. The support which he happily gives to measures of law reform such as this—even if they are modest in scope and unspectacular in aspect—is a valuable contribution to the movement for practical law reform.
I am also glad to acknowledge the words of my noble and learned friend Lord Steyn, which come from a source of great authority. It is a particular pleasure to acknowledge his contribution because it takes the form of a maiden speech. That speech, if I may say so, manifests the depth of perspective, firmness of opinion and cogency of expression which one would anticipate from my noble and learned friend. In offering my sincere congratulations on his speech, I express not only the hope, which I am confident your Lordships will share, that this House will often hear from him again, but also that the opinions there expressed will attract the notice of the Government and stimulate consideration of further steps along the road beyond the single step which the House is being asked to take today. For the moment, however, I need do no more than commend the Bill to the House.
§ On Question, Bill read a second time, and committed to a Committee of the Whole House.