Commercial Litigation: Kulkarnis legacy & the nemo dat rule

Commercial Litigation: Kulkarni’s legacy & the nemo dat rule

Shajib Mahmood Alam, Barrister of Linconl’s Inn

Introduction – A General Overview

What happens when goods subject to security interest are sold?1 What is the position of the innocent purchaser in relation to the secured party?2 The situation that the Court had to consider in Kulkarni3, was where the debtor(Gwent) was in possession of the good(the car) which was subject to a security interest(a hire purchase agreement) in favour of the secured creditor(Manor Credit). The debtor then sold the goods to K who did not know about the hire purchase agreement and paid the full price to the fraudster Gwent. Gwent then went into liquidation and after finding out about the fraud Manor Credit repossessed the car from K. K sought protection under 1 Diamond, A.L., (1989). Chapter 13: “Protection for Purchasers”. A Review of Security Interests In Property. 1st ed. London: H.M.S.O. p.71 2 ibid. 3 Rohit Kulkarni v Manor Credit (Davenham) Ltd [2010] EWCA Civ 69 section 27 of the Hire Purchase Act 1964 that provides an exception to the nemo dat rule. Kulkarni gained much attention because of the fact that the Court of Appeal had to decide which of two innocent parties was to suffer as a result of fraud.4 The first part of this paper outlines the relevant legal provisions that played a major role in the case at hand. The second part, however, aims to undertake a critical analysis of the issues raised by the resent case in light of previous case law and academic commentary in this particular area of the law.

Part I

1.1 Nemo dat quod non habet This common law rule, simply referred to as the ‘nemo dat’ rule, simply means that one cannot give what he does not have. This common law rule (first codified by s.21 of the Sale of Goods Act 1893, now contained in the Sale of Goods Act 1978) represents the law’s 4 ibid. at para 2 per LJ Rix desire to protect property rights even though innocent third parties may suffer in consequence.5 1.2 The exception under s27 of the hire purchase Act and rule 5 Under this legislation, an innocent private purchaser ofa motor vehicle subject to hire purchase obtains good title.6 It provides that where a motor vehicle has been bailed under a hire purchase agreement and, before the property in the vehicle has become vested in the debtor, he disposes of the vehicle to another person who is a private purchaser who has purchased the motor vehicle in good faith without notice of the hire purchase agreement that disposition shall have effect as if the creditor’s title to the vehicle has been vested in the debtor immediately before that disposition.7

Part II

5 Law Reform Committee, (1966). “Twelfth Report (Transfer of title to Chattels)”. Cmnd 2958. p.3 6 Elliott C., (2004). “No justice for innocent purchasers of dishonestly obtained goods: Shogun Finance v Hudson”. Journal of Business Law. May , p.382. 7 http://www.legislation.gov.uk/ukpga/1964/53/section/27

2.1 The primary issue

The issue was whether there had been a disposition (a sale or contract of sale or bailment under a hire purchase agreement) by Gwent at a time when it was a debtor i.e. a hirer under the hire-purchase agreement entered into between Gwent and Manor.8 If there had been, Mr Kulkarni would have good title to the car pursuant to s27.9 If the disposition had taken place earlier, Manor would have better title.10

2.2 The Decision – A brief analysis

It was clear from the facts that, a hire purchase agreement was concluded between M and Gwent and therefore G was the debtor for the purposes of s.27 and was in a place to pass good title in the vehicle to K. The court agreed that K was a private purchaser in good faith without notice. It argued, however, that for s.27 of HPA to apply a “disposition” is required 8 Standing, G. (2010). “The innocent purchaser v the innocent finance company: who gets better title?”. 9 ibid. 10 ibid. by the debtor (Gwent in this case) at a time when it was a debtor in order to pass a good title to the purchaser (K).11 It was accepted by both parties that if the sale to K was completed before the hirepurchase agreement was entered into, the exception could not apply.12 It is worth noting that, at the time K ordered his car, no particular vehicle was identifiable and that made the contract a sale by description of unascertained future goods. The court confirmed, citing s.16 of SGA, that in such a case, no property is transferrable in unascertained goods.13 However, the court further pointed out that, property may pass, even before the actual delivery of the goods, when goods of the relevant description, in a 11 Rohit Kulkarni v Manor Credit (Davenham) Ltd [2010] EWCA Civ 69 at para 13 12 Merrett, L., (2010). “Is possession nine tenths of the law in the sale of goods?”. Cambridge Law Journal.69(2), pp.236. 13 Rohit Kulkarni v Manor Credit (Davenham) Ltd [2010] EWCA Civ 69 at para 20 deliverable state, are unconditionally appropriated to the contract with assent.14 The court maintained that without the registration plates attached, the car was not in “deliverable state” within the scope of s.51(5) of the SGA 1979.15 This is because, the car would not have been legally drivable prior to the attachment of the registration plates and therefore K would not have been bound to take delivery of the car without them. In such a case, the court explained, since rule 5(1)16 was not fulfilled before Gwent became M’s debtor under their hire purchase agreement as there was no evidence that the registration plates were attached prior to the agreement.17 K could establish that he became a purchaser of the car under a disposition which took place at the time of delivery, and thus when Gwent 14 Merrett, L., (2010) op. cit. note. 12, p.237 15 Rohit Kulkarni v Manor Credit (Davenham) Ltd [2010] EWCA Civ 69 at para 24-25 16 Section18 Sale of Goods Act 1979 17 Rohit Kulkarni v Manor Credit (Davenham) Ltd [2010] EWCA Civ 69 at para 26 per LJ Rix was in a position to transfer the property in the car under the nemo dat exception contained within s.27.18 In case that conclusion was wrong, the Court of Appeal went on to consider a further argument raised by Dr. Kulkarni, namely that, in any event, there had been no unconditional appropriation with assent.19 It was held that, an unconditional appropriation by a seller who knows that he has no property in the goods is unlikely to be any more reliable an indicator of the parties’ intentions than his appropriation of goods which are not in a deliverable state or not of the contract description.20 In such a case, property passes upon actual delivery of the goods, in accordance with Rule 5(2).21 Accordingly, by that disposition to him on the evening of 14th March, Dr. Kulkarni obtained good 18 ibid. 19 Merrett, L., (2010) op. cit. note 12, p.237 20 Dobson, P., (2010). “Sale of Goods – passing of property – nemo dat”. Student Law Review. 60, pp.14 21 ibid. title to the car by virtue of s27 of the Hire Purchase Act 1964.22

2.3 The lesson from Kulkarni

The contract in the present case was not for specific goods but for unascertained goods and thus the two exceptions under Rule 5 of s18 of the Sale of Goods Act 1979 were considered.23 The lesson in Kulkarni is to treat the presumptive rule at 5(1) under section 18 of the Sale of Goods Act 1979 with some caution.24 As between Rule 5(1) and Rule 5(2), the judgement in the present case strongly suggests that in the case of a sale of a car to a consumer, Rule 5(2) is the default setting for the courts.25 22 ibid. 23 ibid. 24 Thomas-Symonds, N. (2010). “The Hard Sell”. Solicitors Journal. 154/35. p.12 25 Dobson (2010) op. cit. note 20

2.4 The problem with motor vehicles and the HPA 1964 – an irreconcilable problem?

As it happened in the current case, when a non-owner sells goods to an unsuspecting purchaser two strong claims are in conflict – the right of the true owner to assert his title if another person lays claim to those goods, and the right of the innocent third party who has paid for the goods in good faith to keep those goods as his own.26 As Davenport points out, the problem of who is to bear the loss when an innocent purchaser buys goods belonging to a third party from a seller who did not have right to sell them has long been the subject of academic and quasiacademic controversy.27 Can the law reconcile something that is in practice irreconcilable? In the present case, the Court re-affirmed the rare exception in s27. The decision in Kulkarni, where the right of the innocent third party was upheld, was an 26 Foster A., (2004). “Sale by a non owner: striking a fair balance between the rights of the true owner and a buyer in good faith”. Coventry Law Journal. 9 (2), pp.1. 27 Davenport, B.J., (1994). “Consultation – how not to do it”. Law Quarterly Review. 110(Apr), pp.165. echo of Lord Denning’s words in a judgement given in 1949 where he, despite acknowledging the nemo dat rule, argued that “the person who takes in good faith and for value without notice should get a good title”.28 But Davenport on the other hand disagrees when he argues that, such modifications to the nemo dat rule might be largely destructive of the hirepurchase industry in the long run.29 Even if so limited, in that the exception only applied to motor vehicles, its ramifications are massive.30 This paper would like to warn that decisions and the applicatioof the s27 exception like this can mean that, every hire purchase agreement could potentially lead to deprivation of the motor vehicle and, that sale or return would be a gamble.31 Needless to articulate that such an exception can lead to injustice as it did in the current case. Davenport, rather unsympathetically comments, that the invitation to 28 Bishopsgate Motor Finance Corp. Ltd. v. Transport Brakes Ltd. [1949] 1 K.B. 322 as cited in Diamond (1989) op. cit. note 1 29 Davenport (1994) op. cit. note 27, at p.166 30 ibid. 31 ibid. dishonesty could hardly be more attractive.32 Furthermore, application of the law is inconsistent and lacks certainty. Even more worryingly, the statutory exception regarding this area of the law include detailed limits which can mean that similar cases are not treated alike as one would understand if the decision in Shogun Finance v Hudson is taken into account.

Concluding Words – Is there a way beyond?

Arguably, in Kulkarni, the ideal thing to do would have been to hold the true owner M’s rights as paramount by a strict application of the nemo dat rule. The exception under s27 is ambiguous and unjust since the common law rule known as the nemo dat rule was designed to protect the owner of goods rather than a purchaser of goods to which the seller’s title may be flawed, albeit the purchaser may have acted in good faith.33 32 ibid. 33 Consumer Affairs Department, (1994). “Transfer of Title: Sections 21 to 26 Of The Sale of Goods Act 1979”. DTI. January. As Nick Thomas points out, this is protective of the consumer as it clearly allows the consumer to fully inspect and consider the car before acceptance rather than, in Kulkarni at first instance, property having been deemed to pass simply via email and telephone when registration plate was affixed to a particular vehicle.34 However, on the broad merits of the case, Merrett argues that the right party won. Merrett argues that Manor Credit was in a much better position than Dr. Kulkarni to assess the trustworthiness of Gwent and indeed to absorb the losses caused by Gwent’s fraud.35 She further points out that, the nemo dat rule will often leave innocent third parties like Dr. Kulkarni without redress unless they can fit themselves precisely within one of the specific exceptions to the rule.36 In conclusion, this paper would express the concern that a series of piecemeal and often complex 34 Thomas-Symonds, N. (2010) op. cit. note 24 35 Merrett, L., (2010) op. cit. note 12, at p.237 36 ibid. exceptions cannot guarantee an appropriate apportioning of loss in cases like the one discussed above, where a party such as Manor Credit had voluntarily parted with possession of goods.37

Copyright © Shajib Mahmood Alam 2014