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Supplementary Property Notes by Richard Bigwood UQ
Real Property LLB301 (Queensland University of Technology)
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AN INTRODUCTION TO THE LAW
OF PERSONAL PROPERTY
TC Beirne School of Law
• You will no doubt recall from Law of Property A that the
main division within the law of property is between REAL
property and PERSONAL property:
LAWS3112 — Law of Property B
All forms of LAND (including things
annexed to the land).
REAL:
May be “corporeal” (e.g., the physical
land (e.g., trees and soil) and “fixtures”
(e.g., buildings and fences)), or
“incorporeal” (e.g., easements and
profits à prendre).
Supplementary Notes (Weeks 8–13)
– Personal Property –
Semester 2, 2018
PERSONAL:
Anything that is not “real” property
must be “personal” property (= a
residual or subtractive definition).
May be “tangible” (e.g., cars, books,
cats) or “intangible” (e.g., debts owed
to you, shares in a company, copyright,
patents).
REAL PROPERTY
Rick Bigwood
Corporeal
Incorporeal
PERSONAL PROPERTY
Chattels Real
Chattels Personal
• e.g. leasehold interests
in land
For study purposes only
* NOT FOR CITATION *
Choses in possession
Choses in action
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Personal Property: Basic Taxonomy
“Interests” in Personal Property
Overview:
Tangible: “Choses1 in Possession” (or “Chattels”2)
• Can be protected by taking physical possession (i.e., without
the need for court proceedings).
LEGAL INTERESTS
Possession
• E.g., vehicles, furniture, domestic animals, etc.
• “Possession is 9/10ths of the
law”
E.g.:
• “Finders” cases
• Bailment
• Possession as security (e.g.,
pledges, liens)
• Possession of a chattel is prima-facie evidence of ownership.
Intangible: “Choses in Action”
• Cannot be reduced to a physical form; can only be enforced
or recovered by action.3
Ownership
Legal
Equitable
Intellectual Property
E.g.:
E.g.:
– the legal protection of ideas.
• debts
• shares
• bills of
exchange
• goodwill
• beneficiary’s/legatee’s
interest under a
trust/will
• an interest in a
partnership
1
2
3
4
5
6
7
EQUITABLE INTERESTS
E.g.:
• copyright4
• patents5
• trademarks6
• plant breeder’s rights7
Non-Possessory Securities
The word “chose” is Norman French for “thing”.
“Moveable” things (from the Latin catalla, meaning “cattle”). It’s more common
nowadays simply to refer to such things as “goods”.
Note that although choses in action are intangible, many are represented by
some form of document (“documentary intangibles” versus “pure intangibles”) —
e.g., the right to be paid a sum of money that is embodied in a cheque. But the
“object” being possessed here is not the document but rather the right that it
represents (as a claim recoverable by action in law).
Essentially the right to an original published artistic or literary work. Protects not
the idea but rather the expression of it. There is no property in “ideas” per se.
Gives the inventor an exploitation monopoly, for a period of years (8–25
depending on the type of patent), with regard to the use of his or her invention.
The “exchange” for this monopoly is that the invention becomes public
knowledge.
Ensures that business ideas cannot be poached, e.g., by one manufacturer
imitating the product of another and dressing it up to make it look like the other’s.
Plant breeder’s rights are exclusive commercial rights for a registered variety of
plant. The scheme, established under the Plant Breeder’s Rights Act 1994 (Cth),
protects plant breeders by giving them, in return for an annual fee, a commercial
•
•
•
•
Charges
Equitable liens
Mortgages
Statutory regimes
Ownership
E.g., Trustees and executors
monopoly for a period of time (up to 25 years for trees or grape vines; up to 20
years for other species).
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LEGAL INTERESTS IN (TANGIBLE)
PERSONAL PROPERTY
–
original or derivative title (“general property”);
and/or
–
actual possession or rights to immediate
possession (“special property”).
• Common features of the totality of rights that constitute
“ownership” of tangible personal property include: the
right to use in perpetuity; the right to consume, transfer or
destroy so far as the nature of the subject matter permits;
the right to income, capital and security; the right to
manage; and a residuary right to the thing owned.9
• There are two (and only two) forms of legal interest in
tangible personal property:
1. OWNERSHIP; and
2. POSSESSION.
• These may exist concurrently or separately (= a fact of
great significance in property law (as we shall see)).
• Personal property is the object of direct and absolute
ownership; it is not, like land, subject to the doctrines of
tenure and estates (i.e., personal property is not “held of
the Crown” but rather “fully owned” in an absolute sense).
1. LEGAL OWNERSHIP
• Legal ownership, although indivisible, can be “shared”
(i.e., concurrent, joint or in-common) or “successive”.10
The Nature of Ownership
• As we shall see, in a system where title to property is
RELATIVE, the term “ownership” often proves not to be
very helpful. The most salient question in law is: “Who has
the superior possessory right?”
• “Ownership” is said to be “the greatest right or bundle
of rights and incidents that can exist in relation to
property”. “Owner” = the person with the “best title” —
the one with all the “sticks” in the bundle.
–
“[Ownership] … is, in essence, a conclusion recognised by the law that
a person is entitled to exercise all of the rights capable of being
exercised with respect to property of the kind in question, and the right
to exercise those rights as against all other persons.8
9
• But note that “title” (which may or may not be
synonymous with “ownership”) might arise from a
person having:
8
10
Strange Investments (WA) Pty Ltd v Coretrack Ltd [2014] WASC 281 [74]
(Pritchard J)
That may or may not be the “true” or
“documentary” owner; often it is a “possessory
‘owner’”!
Knapp v Knapp [1944] SASR 257, 261 per Mayo J: “The general right of
ownership embraces subsidiary rights such as exclusive enjoyment, to destroy,
to alienate or to alter, and, of course, the right to maintain, and to resume and
recover possession from other persons.”
Although a bailor, for example, may have a reversionary interest in personal
property at the expiration of the bailment, successive interests are more a part of
estates in land than applicable to personal property (e.g., “To A for life,
remainder to B”). Although no estates can exist in personal property, limited
ownership interests in personalty are possible in equity under a trust.
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Þ
As we shall see, from a third-party
perspective, an assertion of possession is
tantamount to ownership.
• Consider:
- Consensual:
Þ Transfer from an owner (e.g., by way of sale,
deed of assignment, or gift (by delivery,
declaration of trust or inheritance under a will));
“Possession, in the relevant sense, is not merely
evidence of absolute title: it confers a title of its own,
which is sometimes called a ‘possessory title’. This
possessory title is as good as the absolute title as
against, it is usually said, every person except the
absolute owner.”11
–
–
Þ Finding and appropriation of abandoned
property;
Þ Composing a literary work or creating or
constructing an article;
“The English law of ownership and possession …
is not a system of identifying absolute
entitlement but of priority of entitlement …”12
Þ Capturing and taming a wild animal (owner will
acquire ownership of the offspring as well).
The common law’s protection of personal
property is traditionally possession-premised;
as we shall see, the proprietary remedies of tort
law13 require possession and not merely
ownership — “possession is the root of all
title”.14
- Without Consent:
Þ Passing of title by operation of law (e.g.,
bankruptcy, administration of intestate estate;
forfeiture to the Crown (e.g., proceeds of crime);
compulsory acquisition; court order).
• Title is derived from being either the original owner or
the (true or documentary) derivative owner.
The Acquisition and Transfer of Ownership: “Original”
and “Derivative” Ownership
• Note: “nemo dat quod non habet” (“the nemo dat rule”)
= a fundamental rule as to the transfer of title to
personalty.
• Ownership to personal property may be acquired and
transferred in a variety of ways.
–
11
12
13
14
Russell v Wilson (1923) 33 CLR 538, 546 (Isaacs and Rich JJ).
Waverley Borough Council v Fletcher [1996] QB 334, 345 per Auld LJ. What this
means, as we shall see, is that one’s right to possess does not have to be
absolute, merely better than that of the party against whom it is asserted. A prior
possessory title will defeat a later possessory title (where there has been no
relinquishment of the prior possessory title).
I.e., trespass, conversion, detinue — torts involving an unlawful interference with
goods.
Generally, see Richard A Epstein, ‘Possession as the Root of Title’ (1979) 13
Georgia Law Review 1221.
The transferee of goods receives no better title
than that of his or her transferor/predecessor in
title = a “chain-of-title” idea.
• Although nemo dat is a fundamental rule as to the
transfer of title to personal property, it is subject to
exceptions (most being statutory).15
15
E.g., Sale of Goods Act 1896 (Qld), ss 24–27 (considered in Week 11 of the
semester).
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planks and nails and pitch worked into a ship which is under
repair become part of the coat or ship …”19
The Effect of Affixation, Intermingling, etc. on
Ownership16
• Compare the situation where A’s and B’s homogeneous
goods are, by consent,20 simply mixed into one
indistinguishable whole (e.g., A’s oil is mixed with B’s oil
of the substantially same nature and quality21) = a
“commingling” or “intermixture” (or confusio (liquids)
or commixtio (dry goods)) situation.
• What is the legal position when A’s (smaller) goods are
affixed to B’s (larger) goods (e.g., A installs her engine
in B’s car) = a situation of “accessio” or “adjunctio”?
Þ The overriding principle is that the common intention of
the two owners of the goods in their original form prevails.
Þ Where that intention is unclear, the default is that the
ownership of the joined parts is presumed to remain in A
and B severally so long as the parts remain
distinguishable.
Þ The resultant product is presumed to be owned by A and B
as “contributing owners” in common in proportion to the
value of the original owners’ respective contributions (i.e.,
co-ownership).
Þ Where the two parts become indistinguishable, e.g.,
where the incorporation of the smaller part into the larger
part is physically or practically irreversible (e.g., the smaller
item cannot be removed without substantial injury to
either itself or the principal item17), the general rule is that
the owner of the larger thing owns the thing in its new
and enlarged state. The greater simply absorbs the
smaller.18 (It’s basically the same idea that applies in
relation to chattels being affixed to land: the doctrine of
accession (or “fixtures”) considered in Law of Property A.)
Þ Where the intermixture is wrongful (i.e., one of the parties
has not consented to the mixing), the mixture is held for
the respective owners in common in proportion to the
original quantities owned by each of them. Any doubt as
to the original quantities is resolved in favour of the nonconsenting owner.
Illustration from the case law:
– Coleman v Harvey [1989] 1 NZLR 723 (NZCA)
“Materials worked by one into the property of another become
part of that property … Bricks built into a wall become part of
the house; thread stitched into a coat which is under repair, or
16
17
18
• C, on behalf of his company, agree to refine silver coins
supplied by H and to set aside 166kg of fine silver for H.
• The silver from H was to be refined with C’s silver (i.e., an
intermixture situation).
See, generally, Gerard McCormack, “Mixture of Goods” (1990) 10 Legal Studies
293.
This is sometimes known as the “injurious removal” test. In Rendell v Associated
Finance Pty Ltd [1957] VR 604, for example, ownership of a motor installed in a
truck did not pass to the truck owner because it could still be removed without
damage to either the motor or the truck. Ditto for the diesel engines incorporated
into diesel generator sets in Hendy Lennox Ltd v Grahame Puttick Ltd [1984] 1
WLR 485.
Where the owner of the principal chattel seeks to recover it by action, a
precondition to such recovery may be that she or he must pay compensation to
the owner of the minor chattel, such compensation being assessed as an
amount equal to any increase in the principal chattel’s value as a result of the
attachment. See Thomas v Robinson [1977] 1 NZLR 385; McKeown v Cavalier
Yachts Pty Ltd (1988) 13 NSWLR 303, 309–11 (esp).
• C sold the ingots and his company went into receivership.
19
20
21
Appleby v Myers (1867) LR 2 CP 651, 660 (Blackburn J). Similarly, title to the
offspring of animals generally goes with the ownership of the mother. If I paint a
picture on your piece of wood, do you own the picture?
And there is no intention to part with ownership. Compare The South Australian
Insurance Co v Randell (1869) LR 3 PC 101 (later) — a case of what Roman
lawyers used to call “mutuum”, i.e., a loan of something not to be returned in
specie but rather to be replaced by something similar or equivalent (a “loan for
consumption”). This involves a transfer of ownership in the original item “loaned”;
it is not a bailment. In Randell, the transaction was construed as a sale, as the
owner’s entire interest in the goods delivered passed for value.
See Indian Oil Corp Ltd v Greenstone Shipping SA (Panama) [1988] 1 QB 345.
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deposit box (when the car or box may in fact be
in the physical possession of someone else).23
• Held: H had a share as a co-owner, as the goods were
intermixed; H hence had an interest in common in
proportion to his total contribution; there was no parting with
ownership by H.
Illustrations from the case law:
• So, when C sold all the silver he committed the tort of
conversion: he dealt with the owner’s goods in a manner
inconsistent with the owner’s rights and with the intention of
denying the owner his possessory rights over the goods,
without the owner’s consent or otherwise without lawful
authorization. C was thus a joint tortfeasor with the company
(and as the employer company was insolvent, the employee
was sued).
– Lock v Heath (1892) 8 TLR 295
• Compare also “specificatio” situations: a raw material is
altered by labour to produce something new possessing
a different identity (e.g., grapes are supplied to a
winemaker who then turns them into wine, the new goods
being no longer reducible to the original materials).22
•
Husband (H) gave all his furniture to wife (W) by symbolic
delivery of chair to her.
•
The problem, though, was that H and W remained jointly
in possession of the goods thereafter (until W died,
when they were in the sole possession of H).
•
W by her will left all the goods to the couple’s daughters;
but the sheriff seized them under an execution against H.
•
H, as executor of W’s will, claimed the goods on behalf of
the children.
•
Held: H’s act of delivering one item to the transferee (W)
was symbolic of all the items and constituted delivery of
them to W; there were clear words of gift (intention to
transfer) as well as supporting documentation (which
didn’t itself convey title24).
Þ Ownership in the raw materials is simply lost.
2. POSSESSION
Compare:
• There are different kinds of possession:
– In Re Cole (a Bankrupt) [1964] Ch 175 (CA)
i.
Actual (or “factual”) possession;
•
There was an alleged gift between spouses (H ® W) of
all the furniture in the matrimonial house.
ii.
Possession vested in interest but not in fact:
•
H allegedly took W to each room of the house, showing
her the goods and speaking words of gift.
= a right to take actual possession, which right
may be “immediate” or “qualified” (i.e., a future
or reversionary possessory interest only); and
iii.
Constructive (“deemed”, “symbolic”) possession:
• Possession is effected by delivery of the means
of control, e.g., the key to a car or to a safety
22
23
These basically just constitute a form of “accessio”.
24
Principals and employers are also said to be in constructive possession of
property that is in the physical possession of their agents and employees
(respectively), where that property has been acquired and/or is being held by the
latter within the scope of the agency or employment relationship (respectively).
See Willey v Synan (1937) 57 CLR 200.
The document was an inventory to a deed poll. Although it was invalid, it
nevertheless showed a clear intention on H’s part to transfer ownership to W.
What was needed was a bill of sale (a document evidencing the transfer). If H
had registered a bill of sale, that would have been an effective transfer upon
registration. But in the absence of that, proof of an inter vivos gift was necessary,
constituted by proof of a present intention to make the gift and perfection of it by
delivery of the subject matter to the donee.
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i.
•
The furniture then remained in the parties’ joint
possession for nearly 20 years thereafter; it continued to
be insured in H’s name.
•
Note: As H was bankrupt, all of his conduct and
attempted dispositions would be carefully scrutinized.
•
Held: There was no act of (symbolic) delivery or no
change in possession (either being necessary to
completion of the gift).25
• However, what constitutes control is relative
and depends on the kind or nature of the item of
property involved.
“It takes more to capture a tiger than it does to pick a
flower.”26
• Basically, one must acquire such control as the
nature of the case admits.
Actual Possession: Possession in Fact
Illustrations from the case law:
• For actual possession, two elements are required:
1.
– Pierson v Post, 3 Cai R 175 (NY Sup Ct,
1805) (ferae naturae: a dead fox)
Actual physical CONTROL of the property — a
“corpus possessionis”; and
2. An INTENTION to exclusively control it — an
“animus possidendi”.
•
Mr Post was out hunting a fox one day and he had spent
considerable time chasing the quarry down.
•
He had flushed it out onto an abandoned beach, and just
as he was taking aim with his gun Mr Pierson appeared
out of the sand dunes and shot the fox and made away
with the carcass.
•
Mr Post sued the interloper for the value of the fox on
the theory that his pursuit of it had given him a property
right — that he had somehow taken possession of the
fox before Pierson had shot it.
•
Held: A wild animal is something that is capable of
capture and control; it is all about whether there was
physical control of the dead fox; was there an intention
to possess it, which could be seen as a consequence of
that?
•
Occupancy or possession goes to the one who kills the
animal, or at least mortally wounds it, or catches it in a
net so as to deprive it of its natural liberty and render
escape impossible; these acts bring the animal within a
certain control that gives rise to possession and hence
ownership; possession requires some unequivocal act
that the whole world could understand as being a
physical taking or capture of the property in question;
thus, possession and ownership here went to the person
who performed the final act of killing the animal and
1. Physical Control
• Control must be EXCLUSIVE for the purpose of
establishing ACTUAL possession: there must
be a complete taking — a sufficient occupation
to exclude strangers from interfering with the
property.
25
Andrew Bell has argued that a donor may in fact continue in possession while
effectively giving possession to another person, namely, by the donor
constituting him- or herself as a “bailee” from that point on. The donor can then
remain in possession while the donee enjoys an immediate right to possession.
In discussing Lock v Heath (above), Bell thinks it unnecessary, and even
confusing, to rely on symbolism in this context: “For this was clearly as case of
constructive possession: by handing over the item, the deliveror is simply
manifesting his intention to continue in possession of the rest as bailee. Indeed,
the ‘symbol’ is in a sense superfluous: the mere declaration of that intention
without any physical transfer at all is equally effective. The function of the part
delivery is just evidential, to make clear what the deliveror’s intention is; but it is
the intention, not the ‘symbol’, that confers possession, and if the intention
cannot be proved, the only possession that passes is actual possession of the
item handed over” (A P Bell, Modern Law of Personal Property in England and
Ireland (1989) at 58).
26
A P Bell, Modern Law of Personal Property in England and Ireland (1989) 36.
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taking it away in some sort of “capture” scenario; Post’s
claim was a case of “mere pursuit”, not of “capture”.
– Young v Hichens (1844) 6 QB 606 (ferae
naturae: a school of fish)
•
•
•
A commercial fisherman off the coast of Cornwall had
over many hours been working with his team to bring in
a large school of pilchards that he had almost encircled
with his net.
But there still remained a small gap in the net, “some
seven fathoms open” (40 feet), and the employees of the
fisherman were at that gap, making a loud noise and
slapping the water, so that the fish would not escape the
net.
Another fisherman then showed up and threw his net
inside the nearly enclosed net of the first fisherman,
drove his boat through that net, damaging it, and used
his own net to capture the fish.
•
The first fisherman then sued the second fisherman for
the value of the fish.
•
Held: The claim could not succeed: there had not yet
been a sufficient or clear taking on the facts; there was
still a gap in the net; it was possible that the fish could
have escaped; near enough is not good enough; there
must be a consummation of the taking (which is what
the second fisherman achieved).
“It does appear almost certain that the plaintiff would
have had possession of the fish but for the act of the
defendant; but it is quite certain that he had not
possession. Whatever interpretation may be put upon
such terms as ‘custody’ and ‘possession’, the question
will be whether any custody or possession has been
obtained here. I think it is impossible to say that it had,
until the party had actual power over the fish.”
Lord Denman CJ
“[A]ll but reducing into possession is [not] the same as
reducing into possession.”
Patterson J
– The Tubantia [1924] P 78 (a sunken vessel at
20 fathoms in the North Sea)
•
The Tubantia was a Dutch merchant vessel that was
sunk in 1916 (WWI) by a German warship in the North
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Sea — a particularly treacherous and difficult body of
water.
•
It was rumoured to have millions of pounds’ worth of
gold ingots in its hold, and so when the war was over
there was a lot of interest in salvaging the vessel from
the bottom of the North Sea.
•
In 1922, a UK salvage company set out to find the wreck
— to refloat it and recover the cargo.
•
They located the wreck; they put down buoy markers;
they cut out a hole in the side of the ship to gain access
to the cargo; they removed obstacles.
•
That was about all they could do; and so, after about 25
working days, they abandoned work for the winter with
the intention of returning the following year.
•
When spring arrived, they returned to continue their
work.
•
The salvage operation was well underway again when
the defendants, a French company, turned up and tried
to take over the salvage operations.
•
The interlopers started to put down their own buoys and
interfered with the buoys of the first company, cutting
lines and various things.
•
The plaintiffs applied for an injunction to prevent an
alleged trespass on the part of the defendants (i.e., the
plaintiffs were asserting possessory rights over the
vessel).
•
The governing factor was whether, on these facts, the
plaintiffs were in possession of the ship and its cargo;
the defendants argued that the plaintiffs hadn’t “closed
the net”; they had just begun operations; it was still
“open slather”.
•
Held: Mindful of the policy of not discouraging salvage
enterprise at a time when salvage, “by means of bold
and costly work”, was of great public importance, the
Court heard evidence from a number of salvage experts
and held that there was a sufficient taking — a sufficient
assumption/assertion of exclusive control; the plaintiffs
had done enough in a difficult environment; they had
located the wreck, marked it out and secured it; they had
made a taking as much as was possible in those
circumstances; they were thus “in possession” of the
wreck and were accordingly its lawful salvors; they were
entitled to assert those possessory rights against the
defendants who were committing trespass.
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• Note: A lack (or loss) of possession does not
negate title unless there has been
abandonment — an act of renouncing or
deserting property without hope of recovery or
the intention of returning to it.27
• Loss of the right to recover possession, or indeed
in limited circumstances loss of title itself, might
also occur through effluxion of time, under ss
10 or 12 of the Limitation of Actions Act 1974
(Qld) (re limitation of actions in conversion and
detinue)).
• There is, however, a general presumption
against “abandonment” (especially when the
goods are involuntarily taken from one’s control
(e.g., they are lost)), the rebuttal of which
requires “clear and convincing” objective
evidence.
•
In 1857, a ship called SS Central America, which was
carrying large quantities of gold during the California gold
rush, sank in over 8000ft of water.
•
It took over 120 years to find it.
•
The (assignee) owners claimed that they still owned the
gold.
•
This was resisted by the salvors. If they could defeat the
owners’ claim (e.g., by successfully arguing that the
owners had abandoned the property), then they would
become possessory owners, as they were its finder.
•
This was obviously in the salvor’s interest: ownership
would entitle them to all the gold ($1 billion), whereas
salvor’s rights would only entitle them to whatever the
court awarded for their services as salvors (and so the
question was “salvage law” versus the “law of finds”).
•
Held (by majority): There is a general presumption
against abandonment; therefore, the presumption here
was that an owner had not abandoned its interest in the
ship and its contents.
•
Abandonment requires “clear and convincing evidence” to
the contrary (e.g., owner’s express and unequivocal
declaration relinquishing all title; intentionally destroying
all the files they had); or, abandonment may be inferred if
there is a very old (ancient and long-lost) wreck, but this
inference would not be proper if a previous owner
appeared and asserted his or her ownership; in that
event, the presumption would and abandonment would
have to be proved by clear and convincing evidence.
Illustrations from the case law:
– Columbus-America Discovery v Atlantic
Mutual Insurance Co, 974 F 2d 450 (4th Cir,
1992)
•
27
28
– Re Jigrose Pty Ltd [1994] 1 Qd R 382
(Note at the outset that the claimants in this case were
not the original owners (who was the US Mail &
Steamship Co), but rather the insurance companies who
had paid out under the relevant policies and hence were
subrogated to the rights of the original owners/insured
parties. They actually claimed to be assignees of the
original owners and so were now claiming in the capacity
of derivative owners of the gold — $1 billion worth.28)
I.e., “abandonment” is one method of consensual loss of ownership of tangible
personal property.
To explain this a little further: Subrogation is an equitable doctrine involving
the transfer of rights without assignment. And so, when an insurer is
subrogated to the position of the insured, they enjoy a right merely to stand in
the shoes of the insured (for the purposes of bringing a claim), but the chose in
•
This case concerned $20,000 worth of hay that was
accidentally left behind by the vendor after a farm was
sold.
•
The purchasers argued that the vendor had abandoned
the hay, so that it now belonged to the purchasers.
action (i.e., legal title to the cause of action/claim) is never removed from the
insured and vested in the insurer; the insured retains legal title to the claim
throughout. While the insurer (subrogee) enjoys the right to sue nominally in the
name of the insured (subrogor), it is the insured’s action. When an assignment
occurs, in contrast, ownership in the cause of action/claim transfers away from
the assignor and vests entirely in the assignee, who thereafter enjoys all the
rights that the assignor previously had.
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•
The Court was constrained largely by the conditions of the
particular contract for sale; cl 28 deemed items not
removed from the land prior to delivery of possession to
the purchaser to be abandoned by the vendor.
•
Kiefel J considered the common-law position on the point
and concluded that chattels could be abandoned, and the
legal effect of that was that title is divested from the
original, abandoning owner; until it is appropriated by a
new person, it is without an owner (in the global
commons/public domain).
“As a general proposition, if I throw something away I
truly abandon it. I intend no longer to retain possession. I
do not propose to seek it out and I have no further
interest in ownership. If, however, I lose something, I
have not those intentions. I could not be said to have
abandoned it. … [T]itle remains with an original acquirer
of the property until there is shown an intention to
abandon it. It then becomes of public right and is liable to
be appropriated by the next occupier.”
•
•
•
•
The Court said that simply leaving something for that
period of time was not sufficient evidence of
abandonment.
•
Clearly the author had forgotten about the manuscript, but
the evidence must show an unequivocal intention to
abandon the thing in question; mere inactivity — i.e.,
simply failing to demand or collect the item — even years
of inactivity — is usually too equivocal to sustain an
objective inference of abandonment; also, the author’s
failure to communicate his reasons for not demanding his
manuscript back did not strengthen the publisher’s claim
of abandonment.
– Keene v Carter (1994) 12 WAR 20
•
The respondent, a jeweller, was criminally charged with
receiving a gold nugget that he had purchased from a
person transacting on behalf of a 14-year-old girl.
•
Her Honour also said that even though the vendor had
abandoned the hay under cl 28, that did not
automatically vest title in the purchasers (the hay wasn’t
a fixture); there must still be an act of appropriation of
the hay on the purchasers’ part — a manifest intention
to exercise control over it — an outward intention to
exclude others from it.
The girl had found the nugget just a short time earlier at
the local train station, on her way to school; she had
simply kicked it with her shoe and picked it up, although it
was never established exactly where it had been lying at
the station.
•
There had been such an act here, as the purchasers took
steps to prevent the vendor from entering upon the land to
effect removal of the hay.
It was arguable that the girl had committed an indictable
offence under the WA Criminal Code by converting the
nugget, but there was a defence if the person concerned
believed on reasonable grounds that the owner of the lost
item could not be discovered.
•
The respondent’s liability thus turned on whether he knew
that the obtaining of the nugget by the girl constituted an
indictable offence, so that he would not be liable if he also
knew that the girl would have had reasonable grounds for
believing that the true owner could not be found (i.e.,
having regard to what he was told about the place where
the nugget was found, and the short time between the
finding and the attempt by the girl to sell it — some 1 hour
and 45 minutes).
•
In that connection, the possibility was raised as to
whether the nugget had been abandoned, so that there
was no true owner at all (or at least the girl reasonably
believed as much) — i.e., abandoned property cannot be
stolen or converted, and so the respondent could not be
liable.
•
Ipp J discussed the common-law principles and approved
of what Kiefel J had said in Re Jigrose Pty Ltd.
Accordingly, the purchasers now owned the bales of hay,
i.e., through a combination of an intentional act of
abandonment by the vendor, and a subsequent act of
appropriation by the purchasers.
Contrast:
– Moorhouse v Angus & Robertson (No 1) Pty
Ltd [1981] 1 NSWLR 700 (NSWCA)
•
Frank Moorhouse, a famous Australian author, left the
manuscript of his book, The Americans, Baby, with the
publisher Angus & Robertson for some 51/2 years.
•
He then appeared just to forget about it, and there was an
argument that he had abandoned this manuscript.
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•
It was noted that because the girl had sold the nugget
within two hours of the finding, the respondent knew that it
was unlikely that the girl had made any reasonable
attempt to find the true owner or had informed the police
about it, but such steps would be unnecessary if it were
reasonable for the girl to have believed the nugget
abandoned.
•
On the sparse evidence before the court, it was not
possible to know whether the nugget was recently lost or
had been lost a long time — the more recent the loss, the
more likely it is that the owner is discoverable.
•
Regarding abandonment in particular, Ipp J emphasized
the importance of the owner’s intention to totally give up,
desert or relinquish absolutely the item in question; this
was a rare eventuality; even termination of the search for
a lost item does not necessarily imply abandonment.
•
a. knowledge of controlling something; and
b. knowledge of its contents.
• But if you know that something has come into
your control, you do not necessarily have to know
what it is before you can be said to be in
possession of it.
Illustrations from the case law:
- Warner v Metropolitan Police Commissioner
[1969] 2 AC 256 (a criminal-law case29)
In sustaining an inference of abandonment, the court will
consider such matters as:
-
the value of the item;
the circumstances under which it was lost (e.g., the
nature of the place: public vs. private);
the length of time for which it has been lost or out of
the owner’s possession; and
the attempts the owner has made to ascertain its
whereabouts.
•
Generally, however, it would be difficult, said Ipp J, to
establish, inferentially, abandonment of a lost chattel by
its owner.
•
In the present case, without sufficient evidence as to the
exact circumstances of the location of the nugget when
found, it was impossible to draw any inferences as to the
girl’s belief as to the possibility of discovery of the true
owner.
•
It was possible, therefore, that the respondent was not
criminally liable for knowingly receiving, and so the Court
held that the magistrate was right to dismiss the charge
against him.
• Intention generally presupposes “knowledge”,
and knowledge in two senses:
D had control but the issue of intent to control arose.
•
D was charged with possession of unauthorized drugs;
he had in his car (inter alia) two packages: one
contained scent, and the other contained 20,000
amphetamine tablets.
•
D had collected the two parcels and allegedly believed
that both contained scent.
•
And so, the issue arose: Can you possess things of
which you are unaware?
“… As Earl Jowitt has said of it, ‘the English law has never
worked out a completely logical and exhaustive definition
of possession’ (United States of America and Republic of
France v Dollfus Mieg Et Cie SA and Bank of England
[1952] AC 582, 605). In relation to it we find English law,
as so often, working by description rather than by
definition. Ideally, a possessor of a thing has complete
physical control over it; he has knowledge of its existence,
its situation and its qualities: he has received it from a
person who intends to confer possession of it and he has
himself the intention to possess it exclusively of others. But
these elements are seldom all present in situations with
29
ii. Intention to Exercise Continuing Control
•
The rules concerning possession in the criminal law are typically regulated by
the various criminal codes in Australia, or else by crimes legislation in the noncode jurisdictions. Warner is cited here simply because of its general dicta on
intention in relation to the concept of possession. See also Tabe v The Queen
[2005] HCA 59; (2005) 225 CLR 418 [57] (McHugh J): “[T]he term ‘possession’ in
s 9 [of the Drugs Misuse Act 1986 (Qld)] has its ordinary meaning and requires
proof that a person charged under that section knows that he or she has custody
of a substance that is or is likely to be a dangerous drug” (also ibid [102] (Hayne
J)).
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which the courts have to deal, and where one or more of
them is lacking, or incompletely present, it has to be
decided whether the given approximation is such that
possession may be held sufficiently established to satisfy
the relevant rule of law. As it is put by Pollock and Wright,
possession ‘is defined by modes or events in which it
commences or ceases and by the legal incidents attached
to it’ (Possession in the Common Law (1888) p 119 per R
S Wright).”30
Lord Wilberforce
•
Ultimately, possession is relative to the purpose for
which it is sought to be established.
•
Although acceptance of a parcel usually indicates
possession of its contents, a person may not be deemed
in possession if she or he was:
bailee); if so, the airline would be responsible (if the
dishonest employee was responsible for care of the
goods).
•
* * * * * *
- mistaken as to its contents; and
- would not have accepted possession of it if she or
he had known.31
•
In other words, one must know of the contents and
assent to controlling them.
•
Control is strong evidence of possession (i.e., it raises
a presumption), but absence of knowledge (e.g.,
mistake) may negate the inference.
–
31
• The following two topics — “finders” and “bailment” — are
just case studies in the law relating to actual
possession of personal property, and so bear that in
mind as we proceed through them.
But any mistake must go to the nature of the
contents and not merely to their quality (e.g., you
have possession if you know you control tablets —
you don’t have to know they are amphetamines —
compared to, say, if you think they’re bottles of
lemonade).
- Moukataff v BOAC [1967] 1 Lloyd’s Rep 396
(a civil case)
30
Held: The airline was liable notwithstanding that the
contents of the packages were not disclosed; one
need not have knowledge of the contents (i.e., things
inside other things), provided that they fall within the
general class of things of which the defendant is
prepared to take charge;32 here, money fell within the
general class of things of which the airline was prepared
to take charge (the airline was even given the packets in
a special red-labelled mailbag reserved for things of
value); and so the airline was a (sub-)bailee for reward
and owed a duty of care to the owner of the money.33
•
A bank, on behalf of its customer, sent £20,000 in four
packages to Kuwait by registered mail.
•
The Post Office gave them to an airline (BOAC) for
transportation, and an airline employee (a loader) stole
them.
•
The customer sued the airline and claimed that the
airline was a bailee for reward (actually, it was a sub-
Compare also Tabe v The Queen [2005] HCA 59; (2005) 225 CLR 418 [7]
(Gleeson CJ).
As an aside, bear this in mind when we come to consider Chairman, NCA v
Flack (1998) 156 ALR 501 (later), especially the dissent of Foster J.
32
33
Query: Would a (normal) homeowner be prepared to possess drugs in her home
unknown to her? What about a briefcase of cash that in all likelihood represents
the proceeds of the sale of illicit drugs? See Chairman, NCA v Flack (1998) 156
ALR 501 (later).
Compare (later) the concept of “constructive bailment”. This is an illustration of
the same idea. For example, possession of a car may be constructive
possession of its contents, even without the possessor having specific
knowledge of the contents, i.e., if the contents were generally of a type and of a
quantity that one might reasonably expect to regularly be carried in an
automobile (e.g., not a rare painting in the boot). See Heffron v Imperial Parking
Co (1974) 3 OR (2d) 722 (later). See also Rolfe v Investec Bank (Australia) Ltd
[2014] VSCA 38 (no constructive bailment over three Porsche motor vehicles in
shipping containers that had been left on a property (a disused shipping yard)
where the mortgagee was in possession — there was a bailment over the
containers but not over their contents that were not notified to the mortgagee).
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title in relation to tangible personal property (i.e., that it is
possible to have “greater” or “lesser” rights to possession,
— or a “stronger” or “weaker” possessory title — of a
chattel).
THE LAW OF “FINDS”
• The so-called “finders” cases concern items of personal
property that have been lost, hidden, cached or
abandoned on land or in land (or in large “chattels” like
planes, trains, ships, buses, etc.), which property is then
found by a stranger (the “finder”), who takes it into his or
her care and control (i.e., “actual possession”).
• A leading early case is Armory v Delamirie (1722)
1 Stra 505; 93 ER 664, which involved a competition
between a finder and a subsequent possessor (the
true owner having not come forward), and it explains
the title that arises through possession:
• Such cases involve an evaluation of the relativity of the
respective rights of a finder and rival claimants, such
as:
-
the original owner;
-
a subsequent true or documentary derivative owner;
-
a subsequent possessor;
-
the occupier of the premises where the item was
found; and/or
-
the employer or principal of the finder.34
A chimney sweeper’s boy found a ring containing very valuable
gemstones.
•
He took the ring to the defendant, a goldsmith, for valuation.
•
But the defendant returned the ring to the boy minus the stones.
•
The boy sued for damages for conversion of the ring — i.e., an
unauthorized taking.
•
The boy succeeded: even though he was not the absolute owner
of the ring, his possession of it nevertheless gave him sufficient
title to sue in trover (now known as conversion):
“That the finder of a jewel, though he does not by such finding
acquire an absolute property or ownership, yet he has such a
property as will enable him to keep it against all but the rightful
owner, and consequently may maintain trover.”
Pratt CJ
• Whoever has the superior possessory title — which is a
relative thing — succeeds in the contest. Remember: the
finder’s right starts from the absence of any de facto
control by someone else at the moment of finding.
• Although Armory involved a competition between the
finder and a subsequent possessor, the vast majority of
cases involve a contest between:
- A finder (i.e., someone who has entered onto land
and found the item); and
• The law of finders illustrates the importance of
possession and, in particular, the concept of relativity of
34
•
If what is found is so-called “treasure trove” — i.e., gold or silver objects such as
coins or bullion, which are so old that it can be presumed that no true owner or
his or her heirs are undiscoverable — the Crown may well have a superior title to
that of the finder. This is by virtue of special (and ancient) rules relating to such
subject matter. The subject is beyond the scope of this course and so you may
assume it away.
- The land occupier (i.e., the owner in possession or a
tenant).35
35
Again, remember that the same principles apply to “occupiers” of chattels such
as planes, ships, caravans, etc.
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• There are two main considerations in these sorts of
case:
i.
the thing was found ON the land; or
ii.
the thing was found IN the land itself or IN an
improvement on the land.
“The firmer the control, the less will be the need to
demonstrate independently the animus
possidendi.”36
Þ
• Note how the rules are fashioned so as to implement the
governing social policy of locating the true owner and
reuniting him or her with the lost item.
Þ
Consider:
- Chairman, NCA v Flack (1998) 156 ALR 501
Without such rules, the right to lost property
would be subject to a “free-for-all” in which
victory would go to the strongest or most
devious.
i. Things Found ON the Land:
• The occupier of the land is NOT automatically entitled
to the item:
Þ
there must be some manifestation of an
intention to control things that may be on the
land (i.e., immediately before the item was
found).
• If such an intention is manifested, the occupier enjoys
a superior claim to that of the finder, but subject
always to a claim of the true owner (assuming no
abandonment by him or her).
• What does “manifest intention to exercise control”
mean/entail?
Þ
There is a “presumption” in relation to private
residences that the occupier “will ordinarily
manifest the necessary intention to control
chattels therein”.
it is necessary to look at the individual
circumstances.
36
•
Mrs F was the tenant of a public-housing unit in Glebe,
Sydney.
•
She had a son, Glen, who was a person of interest to
the police.
•
The evidence was that Mrs F had given Glen a key to
the unit but he didn’t live there; he came and went as he
pleased.
•
One day the police executed a search warrant at the
unit, expecting to find drugs belonging to Glen.
•
They found nothing, except toward the end of the
search, high in a hallway cupboard, a black briefcase
was discovered, hidden behind some bags; the
briefcase contained $433,000 in cash.
•
Mrs F was visibly horrified when presented with the
finding, and she denied all knowledge of the case and its
contents; she said that she hadn’t been in the top half of
the cupboard since moving into the residence some 12–
13 years earlier. (It was highly likely that the briefcase
was cached by someone recently, as some of the
banknotes were very newly stamped or printed.)
•
The police seized the briefcase and the money, but they
were unable to prove any crime against Glen; and the
true owner of the money (perhaps understandably)
never came forward.
•
At common law (as well as under statute), articles seized
under a warrant cannot be kept for any longer than is
reasonably necessary for the police to complete their
investigations or preserve them for evidence; and so,
Parker v British Airways Board [1982] 1 QB 1004 at 1020 (Eveleigh LJ).
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some three-and-a-half years having passed since the
search and seizure, time had run out for the police.
odds with her patent rejection of it at the time of
discovery; the fact that she would have refused, ex ante,
possession of the item rebuts the presumption of an
intention to control it (otherwise the presumption would
impose upon her possession of unwanted goods).
•
Mrs F thus brought an action for recovery of the
briefcase and its contents.
•
Held (by majority): The briefcase was not attached to the
land, and it was accepted that Mrs F hadn’t put it there;
she was in physical control of her home, hence of
everything in it (even if she didn’t know the items were
there); because there was such a high degree of control
of the residence, there was no need to prove an intent,
on the occupier’s part, to possess items — it was simply
presumed (rebuttable).
“In my respectful view, this is a case where a person to
whom Mrs Flack had provided means of access to her
premises for lawful purposes has, contrary to the licence
so bestowed, imposed upon Mrs Flack by depositing in
her premises, in a manner that deliberately concealed the
fact from her, goods which she would never have
consented to take into her custody or control. In these
circumstances, I am not prepared to find that possession
of these goods in fact passed from the depositor of them
to Mrs Flack. It remained with the depositor. They never
came ‘within the protection of [her] house’.”
“[T]he occupier of a private home will ordinarily manifest
the necessary intention to control chattels therein. …
[T]hat accords with common sense.”
Heerey J
•
“[A]n owner or lessee, is presumed to exercise control
over each and every part of that home and everything in
it.”
Tamberlin J
•
•
Neither at common law nor under statute is there a
general power of the state to forfeit goods simply
because they appear “suspicious”; the police could not
rebut the presumption of intention to control (hence
possession) in Mrs F’s favour; at no time had Mrs F
disclaimed possession (her exclamations of surprise
and anxiety when the briefcase was first discovered
merely attested to her lack of knowledge, and hence,
implicitly, non-ownership, of the case); while “unusual”,
there was nothing illicit or illegal in what was found
(compare an illegal substance or prohibited dangerous
weapon, where the presumption of a general intention of
control might well be rebutted or not arise); the police’s
statutory right having expired, they no longer had an
equal or better right to possession to the money than
Mrs F.
Foster J (dissenting): Not only was the article found
“unusual”, it was indeed of a “highly suspicious”
character — a fact acknowledged by Mrs F at her police
interview; the only reasonable inference to be drawn
from Mrs F’s reaction at first discovery of the briefcase
was that if the person who had put it there had asked
her permission to store it in her home, he or she would
have been firmly refused; owing to its “suspicious”
nature, Mrs F would not have taken it into her care and
control; her later demand for return of the money is at
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Because Mrs F did not have possession of the goods
prior to their seizure under the warrant, she could not
now have a superior claim to the police who had seized
them with lawful authority and continue in possession.
Illustrations from the case law:
- Parker v British Airways Board [1982] 1 QB
1004: item found in a public area
•
Mr Parker was travelling from London to New York and he
went to an executive lounge at Heathrow Airport.
•
There he found a gold bracelet on the floor of the lounge.
•
He handed the bracelet to an official of British Airways, the
occupier of the lounge (as lessee of the Airport Authority),
together with a note containing his name and address, and
asked for the bracelet to be returned to him if it was not
claimed by the owner.
•
The true owner never came forward and British Airways
ultimately sold the bracelet and kept the proceeds: £850.
•
Held: Mr Parker, who was not a trespasser in the lounge,
was lawfully entitled to the bracelet, hence to the proceeds
of sale that now represent it; British Airways as occupier
did not manifest any intention to control things that might
be on the premises, which was essentially a public area
(e.g., there was no evidence that they searched for lost
property regularly or at all; no sign was posted to users of
the lounge that found items must be handed in to lost
property).
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•
acquaint the true owner of the finding and present whereabouts
of the chattel and to care for it meanwhile.[39]
Note that Donaldson LJ emphasized that the occupier’s
intention to exercise control over things on the land must
be manifest (i.e., obvious or apparent); the mere right to
exercise such control is insufficient; so, it must actually be
exercised.
Rights and liabilities of an occupier
1. An occupier of land has rights superior to those of a finder over
chattels in or attached to that land and an occupier of a building
has similar rights in respect of chattels attached to that building,
whether in either case the occupier is aware of the presence of
the chattel.
2. An occupier of a building has rights superior to those of a finder
over chattels upon or in, but not attached to, that building if, but
only if, before the chattel is found, he has manifested an
intention to exercise control over the building and the things
which may be upon it or in it.
3. An occupier who manifests an intention to exercise control over
a building and the things which may be upon or in it so as to
acquire rights superior to those of a finder is under an
obligation to take such measures as in all the circumstances
are reasonable to ensure that lost chattels are found and, upon
their being found, whether by him or by a third party, to
acquaint the true owner of the finding and to care for the
chattels meanwhile. The manifestation of intention may be
express or implied from the circumstances including, in
particular, the circumstance that the occupier manifestly
accepts or is obliged by law to accept liability for chattels lost
upon his “premises,” e.g. an innkeeper or carrier’s liability.
The Parker Rules:37
Rights and obligations of the finder
1. The finder of a chattel acquires no rights over it unless (a) it
has been abandoned or lost and (b) he takes it into his care
and control.
2. The finder of a chattel acquires very limited rights over it if he
takes it into his care and control with dishonest intent or in the
course of trespassing.
3. Subject to the foregoing and to point 4 below, a finder of a
chattel, whilst not acquiring any absolute property or ownership
in the chattel, acquires a right to keep it against all but the true
owner or those in a position to claim through the true owner or
one who can assert a prior right to keep the chattel which was
subsisting at the time when the finder took the chattel into his
care and control.
4. Unless otherwise agreed, any servant or agent who finds a
chattel in the course of his employment or agency and not
wholly incidentally or collaterally thereto[38] and who takes it into
his care and control does so on behalf of his employer or
principal who acquires a finder’s rights to the exclusion of those
of the actual finder.
5. A person having a finder’s rights has an obligation to take such
measures as in all the circumstances are reasonable to
37
38
Parker v British Airways Board [1982] 1 QB 1004 at 1017–18 (Donaldson LJ).
A nice illustration of a finding wholly incidental or collateral to the finder’s
employment is Byrne v Hoare [1965] Qd R 135. There, an on-duty police
constable found a gold ingot at a drive-in theatre and the Crown (employer)
claimed it on the basis that the ingot was found within the course of the
constable’s employment. However, the constable was employed at the drive-in
to supervise traffic, not to search for lost property. His employment merely gave
him the opportunity to find the lost item — placed him in the right place at the
right time — and he was merely walking in a public place like any ordinary
member of the public would; that he was “on duty” when the finding occurred
was a mere coincidence. The constable’s employment was not the effective
cause of his finding the ingot. As Gibbs J said (at 148): “To give the master a
right to a chattel found by his servant, it is clearly not enough that the servant
happened to be going about his duties when he found it, for the fact that he was
performing his duties may have been accidental, and not the cause of the
finding.”
39
It is, of course, a question of fact as to what, in this connection, should
reasonably done in the particular circumstances. In R v MacDonald [1983] 1
NSWLR 729, for example, the Court of Criminal Appeal of New South Wales
said this (at 732–3):
“The finder’s belief, in our view, is to be inferred from the facts and circumstances
surrounding the finding and the taking of the goods, and in this respect regard may
be had not only to what the finder does in relation to the goods but also what he
does not do that might reasonably be regarded as consistent with the actions of an
honest man finding goods. Did the finder examine it closely to see if it gave any
clue to its owner by name tag or otherwise? What avenues were reasonably open
to the finder to locate the owner? A person finding goods may be taken to know that
the person who has lost those goods may well retrace his steps with a view to
recovering them, and so the leaving of the finder’s name and address with
someone at the place of discovery may be one means of locating the owner. It is
common knowledge in our community, and the finder would know, that the police
will receive lost property handed in and take care of it and accordingly the finder
would think that the loser might make an inquiry of the police in the area where he
believes he may have lost his property. It is common knowledge that newspapers
publish ‘lost and found’ columns. These and perhaps other considerations would
ordinarily be present to the mind of an honest person finding property in a suburb of
Sydney. Each case must be looked at according to its own facts, and the place
where the property is found and the nature of the property will, in most instances,
readily indicate the avenues that are reasonably open to find the owner.”
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4. An “occupier” of a chattel, e.g. a ship, motor car, caravan or
aircraft, is to be treated as if he were the occupier of a building
for the purposes of the foregoing rules.
keep it, i.e., if there is no one else who can make out
a superior possessory claim.
Þ
- Tamworth Industries Ltd v Attorney-General
[1991] 3 NZLR 135: item found on private land
•
Police executing a search warrant came across a cache of
drugs (cannabis) and $52,000 cash in a KFC box and
some brown paper bags under the floorboards of a disused
building on an 11.5-acre site.
•
The buildings were leased by Tamworth, the sole director
of whom was a man named Dods.
•
Dods was originally accused of possession of narcotics but
was subsequently acquitted of the charge.
•
Emboldened by his acquittal, Dods (Tamworth) claimed the
money based on an alleged “possessory title” — one that
he alleged to be better than that of the police as “finders”.
•
Held: Applying the Parker principles, Dods (Tamworth) as
the lawful occupier of the land40 did not have a superior
possessory title to that of the police, as he had not
manifested an intention to control the land and any things
that might be on the land; although the land was “private” in
nature, over 500 people had entered the land to pick maize
in the period of a month, others used the buildings for
storage, and neither Tamworth nor Dods restricted access
or checked or supervised them; again, the Court
emphasized that the mere right to control is INSUFFICIENT
— the right must actually be exercised.41
• Aside: Note that just because the “found” item might
have had “dubious” origins, this does not mean that
the one who found it “dubiously” is not entitled to
40
41
Note that Eichelbaum J had to first determine whether the plaintiff was in fact the
lawful occupier of the land; and although the lease from which he derived his
possessory interest had expired, on balance it was assumed that he was
holding over, and so remained lawfully in possession.
Ironically, Dods, when defending himself against criminal charges for
possession of narcotics had denied that he had control of the buildings and their
contents and said that anyone could gain access. So, it was rather audacious for
him to argue the opposite in regard to money that was also found by the police
at the same time.
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Indeed, even a thief may have superior title
over property that, on the balance of
probabilities (but not beyond reasonable
doubt), was stolen, e.g., as against the police
who are in possession of the property but no
longer authorized to keep it (say, for the
purposes of investigations).
Illustration from the case law:
- Costello v Chief Constable of Derbyshire
Constabulary [2001] 1 WLR 1437 (EWCA)
•
Mr C had come into possession of a motor vehicle, although
the authorities were suspicious as to whether he had acquired
it lawfully.
•
And so, they seized the motor vehicle from Mr C under the
Police and Criminal Evidence Act 1984 (UK).
•
But the police’s possessory title under the statute was
temporary only; they were entitled to possession only for as
long as was reasonably necessary to conduct investigations;
but once investigations were exhausted, they had to return
the car to the previous possessor.
•
Now, although it was more probable than not that the vehicle
had been stolen, ultimately this could not be shown to the
criminal standard of proof; but still the police were reluctant to
return the vehicle to Mr C, whom they considered to be a
totally underserving character.
•
Despite the fact that the Court could see that something
dubious was going on with Mr C’s historical relationship with
the vehicle, it invoked an important principle of personal
property law, namely, that possession gives title:
“[A] thief obtains a good possessory title as against a
wrongdoer against him, but … if possession is lawfully divested
from him and vested in another, his prior possession will not
avail him to recover possession. …
[I]n Field v Sullivan [1923] VLR 70 … the claimant claimed the
return of goods seized by the police believing them to be
stolen. The theft was not established and the claimant as the
party in possession at the time of the seizure was held entitled
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to their return. Macfarlan J (with whom Cussen J agreed) said,
at pp 84–85:
‘If A is in possession of goods, he is prima facie in lawful
possession of them, and prima facie has the right to that
possession; in the absence of any evidence to the contrary, in
any proceedings that possession is proof of ownership; but that
possession may be divested out of him, either lawfully or
unlawfully. If unlawfully, his right of possession remains. As
against the person who unlawfully deprived him of his
possession (B), or those claiming through him (C), A’s
possession (even if wrongful) up to the time of seizure, is
sufficient evidence to establish his right to possession; nor can
those persons set up that the goods were in A’s possession, but
were really the property of X, though, of course, if B took
possession on behalf of and with the authority of X, who is
shown to be the true owner, that might be set up to show that B’s
seizure was not unlawful. If the divesting is lawful, A’s right of
possession may be destroyed entirely, or may be merely
suspended or temporarily divested … So, where the law permits
them to be seized or detained for a certain time, or for a certain
purpose, or until a certain event, A’s right to possession is
suspended or temporarily divested, and the right of possession is
vested in, or A’s right to possession is displaced by, the right of
possession in the person authorised to seize them or detain
them for the period during which he is so authorised. In other
words, A’s property and right to possession are made subject to
the right of the police or other person seizing under the authority
of the law to detain them during the period during which the
detention is authorised; when that time expires, and no lawful
order has been made for their disposition, his right to
possession, if nothing more appears, again operates. I say ‘if
nothing more appears’, for it may appear by evidence that A
never had a right of possession, as in Buckley v Gross, and that
therefore there was no suspended right of possession to revive
or again operate.’
ii. Things Found IN the LAND or IN an
IMPROVEMENT on the LAND:
• Here, the occupier’s position is much stronger:
Þ
• Hence, the degree of control is not so important:
the occupier will automatically have
possession; it suffices that the occupier can
prevent interference with the land (e.g., exclude
people from excavating).
…
In my view, on a review of the authorities (save so far as
legislation otherwise provides), as a matter of principle and
authority possession means the same thing and is entitled to
the same legal protection, whether or not it has been obtained
lawfully or by theft or by other unlawful means. It vests in the
possessor a possessory title which is good against the world
save as against anyone setting up or claiming under a better
title. In the case of a theft the title is frail, and of likely limited
value …, but none the less remains a title to which the law
affords protection.”
Lightman J (Keene LJ and Robert Walker LJ agreeing)
•
it is basically DEEMED that the occupier has
possession of anything buried in the land
or incorporated in anything that is part of
the land, e.g., a building).
Thus, Mr C’s title may not have been as good as the true
owner’s, but it certainly gave him a better title than the
police in this instance; the police’s title was temporary and for
a specific purpose, which purpose had expired.
Illustrations from the case law:
- South Staffordshire Water Co v Sharman [1896]
2 QB 44: buried objects (private land)
•
Sharman was a diver contracted by the Water Co, which
was the owner of water reservoir known as “Minster Pool”.
•
He was engaged, along with others, to go down to the floor
of the pool and clean it up.
•
Sharman found, embedded in the mud, two gold rings that
had been flung into the pond and settled well into the mud
over time (inches).
•
The true owner being out of the picture, the contest was
between the Company as occupier of the land and
Sharman as finder of the rings.
•
Held: Even though Sharman had taken the rings into his
care and control, the Company had the better right of
possession; anything in the land is possessed by the
occupier of the land regardless of a lack of awareness as to
the item’s existence; the occupier’s de facto possession is
constituted by his or her general power and intent to
exclude unauthorized interference with the land.
“The principle on which this case must be decided, and the
distinction which must be drawn between this case and that
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of Bridges v Hawkesworth [a bundle of banknotes found on
the floor in a public part of a shop], is to be found in a
passage in Pollock and Wright’s Essay on Possession in the
Common Law, p 41:
‘The possession of land carries with it in general, by our law,
possession of everything which is attached to or under that
land, and, in the absence of a better title elsewhere, the right
to possess it also. And it makes no difference that the
possessor is not aware of the thing’s existence. … It is free to
anyone who requires a specific intention as part of a de facto
possession to treat this as a positive rule of law. But it seems
preferable to say that the legal possession rests on a real de
facto possession constituted by the occupier’s general power
and intent to exclude unauthorized interference.’
- Corporation of London v Appleyard [1963] 2 All
ER 834: things incorporated in a building
Corporation ¬ Building Owners ¬ Contractors ¬ Workmen
Freehold owner
A father and son (the plaintiffs), by using metal detectors,
discovered priceless artefacts (the Derrynaflan Hoard) on
someone else’s land.
•
No permission had been obtained to excavate, and so the
plaintiffs were trespassers.
•
Three parties were initially involved — the finders (plaintiffs),
the landowners, and the state (the National Museum that
had received the artefacts from the plaintiffs for safe-keeping
pending the determination of ownership).
•
The landowners dropped out because they assigned their
interest to the state in exchange for payment of £25,000
each (a good bargain considering that the Hoard had an
appraised value of £5,510,200!).
•
•
The finders were successful at trial; they were awarded the
artefacts themselves or, at their election, the sum of $5.5
million.
Held (on appeal): Following Sharman and Parker, the
owners of the land, who were also in possession of the land,
were entitled to the find; they had better title over the
finders (who were also trespassers, hence acquired very
limited rights), but they had by agreement vested their title
in the state; the owner of land (meaning the occupier) is
entitled to any chattel that may be in the land, even where
the finder is excavating the land with the licence of the
owner.
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Finders in course
of employment
Workmen demolishing a building found banknotes (£5,728)
in an old safe that was recessed in one of the walls.
•
The lease from the Corporation to the building owners
preserved the Corporation’s right to any article of value
found upon any remains of former buildings and the
workers were employed by contractors engaged by the
building owners.
•
The workmen claimed as finders, but because they found
the banknotes within the course of their employment, they
were bound to account to their employer or principal.
•
The contractor was likewise bound to account to the
building owner, who was the occupier of the land (as lawful
tenant).
•
But the tenant, who had de facto possession of the
banknotes as the occupier of the land, was ultimately
answerable to the Corporation, the freehold owner,
because of the clause in the lease.
Lord Russell of Killowen CJ
•
Employers of finders
•
That is the ground on which I prefer to base my judgment.”
- Webb v Ireland [1988] IR 353: buried objects
(private land)
Occupying tenant
- Waverley Borough Council v Fletcher [1996] QB
334: buried object (public land); finder acting
unlawfully
•
The Council was the freehold occupier of a public
recreational park in Surrey, England. It exercised control
over the park by means of a ranger, his staff, and certain
by-laws.
•
Fletcher, using a metal detector, found a mediaeval gold
brooch buried nine inches beneath the surface in the
Council’s park.
•
Fletcher claimed title to the brooch as finder, arguing that
manifest control over the land (on the part of the Council)
should be necessary regardless of whether the item was in
the ground or on it.
•
The Council, as occupier of the land, claimed the brooch as
against Fletcher and succeeded; indeed, excavating in the
park was beyond “recreational” and “inherently invasive”;
hence, it went beyond the implied licence given to
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members of the public using the park, making Fletcher a
trespasser.
•
The Court affirmed (and explained) the Parker principles,
upholding the usual distinction between things found in the
land (or attached to it) and those found on it — “the
authorities reveal a number of sound and practical reasons
for the distinction”.
• B has a vested right to recover possession
immediately.
E.g., I rent you my goods for 30 days. On day 31, I am
entitled to demand my goods back immediately.
Illustration from the case law:
“In my view, the two main principles established by the
authorities, and for good practical reasons, are as stated by
Donaldson LJ in Parker v British Airways Board [1982] QB
1004. I venture to restate them with particular reference to
objects found on or in land, for he was concerned primarily
with an object found in a building. (1) Where an article is
found in or attached to land, as between the owner or lawful
possessor of the land and the finder of the article, the owner
or lawful possessor of the land has the better title. (2) Where
an article is found unattached on land, as between the two,
the owner or lawful possessor of the land has a better title
only if he exercised such manifest control over the land as to
indicate an intention to control the land and anything that
might be found on it.”
Auld LJ (Ward LJ and
Sir Thomas Bingham MR agreeing)
•
- Wilson v Lombank Ltd [1963] 1 All ER 740
However, even if Fletcher’s argument had been sound, the
Court opined that the Council had manifested sufficient
control, despite the “public” nature of the land in question,
given (a) the Council’s statutory powers and duties, (b) the
terms under which it held, controlled and managed the
park, and (c) the way in which it exercised that control and
management.
b. The Right to Possession: Possession Vested in
Interest Only
- A is in actual physical possession of B’s personal
property and B has the right to take actual
possession of that property from A.
•
P bought a motor vehicle from someone who had no title.
(P thus acquired, as against the true owner, no title
himself (ownership), but he was nevertheless in
possession subject to the true owner’s rights.)
•
P took the vehicle to a garage for repairs, and, after the
repairs had been completed, the vehicle was left on the
forecourt of the garage for collection by P.
•
A representative of D, which also was not the true owner,
visited the garage and convinced the garage owner to let
him take the vehicle away, thinking it belonged to D.
•
Later, when D discovered that the vehicle did not legally
belong to it, it delivered the vehicle to the true owner.
•
P, having no ownership but possession, brought an action
in trespass against D and succeeded.
•
Note that the garage did the repairs but had no lien on
the vehicle pending payment; because P was a regular
customer (8 years) with ongoing credit terms, the garage
had no right to retain the vehicle pending payment —
there was thus an implied term between P and the
garage that there would be no lien.
•
So, P had an immediate right to possession; in fact
(said the Court), he never lost it, because at any time he
could have demanded the vehicle’s return.
•
P could therefore maintain a trespass action, which is
based on unlawful physical interference with
possession of goods (later).
ii. “QUALIFIED” Right to Possession:
• TWO varieties:
• There is some precondition to recovery — B’s
right to possession is SUSPENDED or
i. “IMMEDIATE” Right to Possession:
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DEFERRED (i.e., it is a future or reversionary
right).
BAILMENT
E.g., I rent you my goods for 30 days. On day 25, a
third party commits a trespass against my goods.
But since I had no right to demand possession of
the goods on that day (they still being under hire
to you), I have no standing to complain of the
trespass (although you do, based on your
possessory title).
Some General Points:
1.
Illustration from the case law:
A bailment arises when one person (“the bailee”) is,
willingly and with AUTHORITY , in POSSESSION of
tangible personal property42 that belongs to
ANOTHER (“the bailor”), who has BETTER TITLE.43
– Ward v Macauley [1791] 4 TR 489; 100 ER
1135
•
P leased a furnished house to D.
•
The sheriff levied execution against D and took P’s
furniture (even though he had notice that it belonged to
P).
•
The necessary authority may be supplied by
the bailor’s consent, express or implied, or by
operation of law.
Þ Bailment represents a transfer of possession in
the goods without a transfer of ownership: It is
the lawful separation44 of ownership and
possession that is vital.45
P brought an action for trespass and failed because P
only had a qualified right to possession — he was only
entitled to return of the furniture when the lease expired
(therefore, he had an insufficient degree of possession to
found a trespass action).
Þ The bailee has actual possession (= a
possessory interest), while the bailor has
ownership (which typically involves a
* * * * * *
42
43
44
45
I.e., bailment is not possible in relation to land or intangible personal property.
Note that the “better title” need not be ownership; it could be a superior
possessory title, as in the case of “sub-bailment (later).
Obviously, if the separation of possession and ownership is unlawful, e.g., a
theft situation, there is no “bailment”, even though the owner’s ownership of the
goods remains intact while physical possession happens to lie with another, the
thief. Even a bona fide purchaser for value without notice deriving title through
the thief does not become a “bailee” of the true owner, despite ownership of the
goods still remaining in the true owner and possession now being with the
innocent third-party purchaser: the innocent purchaser believes herself to be a
derivative owner of the goods (through the thief) and does not take them
voluntarily into her possession in the knowledge of a better title lying in someone
else!
Compare the general observations of Marks J in AGC Ltd v Ross [1983] 2 VR
319 at 329–30.
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Turner J in Motor Mart Ltd v Webb [1958] NZLR 773 (later)46
reversionary interest to possession — i.e., a right
to get the item back at the end of the bailment).
2.
• Note: It is very common to find, in cases and texts,
definitions of “bailment” that emphasize delivery of
the goods to the bailee “on the condition (or under
an express or implied promise) that when the
bailment ends they will be returned in specie to
the bailor” (e.g., Windeyer J in Hobbs v Petersham
Transport Co Pty Ltd (1971) 124 CLR 220 (later)).
Once someone is a bailee, she or he will generally owe
certain obligations to the bailor, e.g., to take
reasonable care of the goods, and (usually) to return
them in specie47 at the end of the bailment (or more
generally to place them at the disposal of the bailor).
Þ
• Caution is, however, needed here, as such
definitions are unduly restrictive. Bailors might, for
example, sell the goods to a third party while they
are in the possession of the bailee, and so the third
party, rather than the bailor, will ultimately take
possession upon termination of the bailment
(typically through presentation of documentation
evidencing the sale).
3.
BAILMENT covers a variety of situations.
E.g.: warehousing; hire purchase; pledge; holding
someone’s goods for safekeeping; dry cleaning;
lending your car to your friend; leaving your car
with a garage for servicing or repair, or leaving it in
a paid-parking facility …
• Some authorities anticipate this potentiality by
adding to the definition of bailment: “… goods are
returned to bailor or according to his or her
directions”.
• But even this is too narrow, because it doesn’t
cover the situation whether the BAILEE him- or
herself becomes the OWNER of the goods (e.g.,
hire-purchase agreements; Romalpa clauses at
common law; bailee (warehouse) sells the goods
under a contractual right where storage charges are
unpaid).
This is often the only reason why the owner of
property lost or damaged wants to characterize
the person in possession of the goods as bailee
(e.g., the car-park cases (below); Moukataff
(earlier) re packages delivered by Post Office to
airline).
• Bailment can arise in some quite unanticipated
situations, and have definitive implications for the
outcome of the dispute. It’s not a closed list of
circumstances (obviously).
Illustration from the case law:
46
“I do not agree that there can be no bailment except with an
obligation to redeliver to the bailor.”
47
Turner J was approvingly cited in this regard by Dawson J in Gamer’s Motor
Centre (Newcastle) Pty Ltd v Natwest Wholesale Australia Pty Ltd (1987) 163
CLR 236, 263 (HCA). See also Strange Investments (WA) Pty Ltd v Coretrack
Ltd [2014] WASC 281 [137] (Pritchard J) (“[Windeyer J in Hobbs v Petersham
Transport] … did not suggest that an obligation to redeliver is a necessary
feature of a bailment, and it is now well established that such an obligation is not
a prerequisite for the existence of a bailment”).
I.e., in their actual or original form.
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- Papathanasopoulus v Vacopoulus [2007]
NSWSC 502
4.
•
Mr V gave Ms P a $15,000 engagement ring at an elaborate
engagement party in Sydney.
•
However, about 10 days later the couple argued and Ms P
called the wedding off.
•
She tried to hand the ring back, but Mr V wouldn’t take it. Ms
P took the ring off her finger and placed it on the coffee table
as Mr V tried to convince her to marry him.
•
Eventually Mr V left without the ring.
•
Ms P’s father then phoned Mr V and asked him to come and
collect the presents from his side of the family, as well as the
engagement ring.
•
Mr V kept on professing his love for Ms P but she told him to
leave her alone; she eventually got so sick of the harassment
that she instructed her father to throw the things out, including
the ring.
•
All went into a wheelie bin and off to the Manly tip in the
rubbish collection, and that was the last to be seen of the
expensive engagement ring.
•
In due course Mr V changed his mind and wanted the ring
back. Ms P told him it was at the Manly tip and so he sued her
for its value.
•
Held: Ms P was liable for breach of bailment; when the gift
was disclaimed, she no longer had ownership of the ring; but
because it was still in her possession, she became bailee of
Mr V’s property; accordingly, she owed him the duties of a
gratuitous bailee: she had to look after it/keep it safe [although
these duties are limited if the bailee is, as Ms P clearly was,
what is sometimes referred to as an “involuntary” bailee];
she couldn’t just throw the ring away; by doing so, she
converted the ring.
Some KEY CONCEPTS:
A PARTING WITH POSSESSION
= a central
element of
bailment.
Þ The bailee (or his or her servant or agent on the
bailee’s behalf48) must have assumed
sufficient CONTROL over the bailor’s goods.
e.g., cars left at a car park.
Ask: Has the car park authority assumed a
sufficient degree of CONTROL?
Illustrations from the case law:
- Ashby v Tolhurst [1937] 2 KB 242
“If a party rejects the gift of an item as the magistrate found, it
is not open to her, if she later takes control of the item, to
claim the item as a gift when she continues to assert that she
does not want it and asks for it to be thrown out. A party
cannot be forced to take or accept a gift. Upon VP rejecting
the gift she became a bailee of that item so long as she had it
in her control. It is not open to a bailee to cause the item
bailed to be thrown into the garbage bin. This is especially so
where the item is valuable and no proper notice was given
and but a short time had elapsed. Holding a small item, such
as an engagement ring is not a great chore.”
•
P paid a fee and left his car on a site owned by D.
•
There was an exclusion clause on the “car park ticket”
that purported to absolve D (the proprietors) from
liability:
“The proprietors do not take any responsibility for the
safe custody of any cars or articles therein nor for any
damage to the cars or articles however caused ... all
cars being left in all respects entirely at their owners’
risk.”
48
•
P’s car was stolen due to the carelessness of D’s
employee (he carelessly gave the car to a stranger
pretending to be P’s friend), and so D could be
vicariously liable.
•
The question was whether P had delivered
possession of the vehicle to D (thus making D a
bailee, with a consequent duty to take reasonable care
of P’s goods).
•
Held: Bailment was negated by the terms of the
contract itself (the exclusion clause).
Ultzen v Nicols [1894] 1 QB 92; Cambridge v Anastasopoulos [2012] NSWCA
405.
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•
•
Moreover, there was no parting with possession; P
was merely a licensee with respect to the physical
space occupied by P’s car; D was, therefore, only a
licensee (not a bailee) with respect to P’s car (= a
defence to trespass) — i.e., no different than if P had
parked his car in a public street and put money in the
meter — the fee was to occupy a space only.49
Note, too, that P had retained the keys: the car was
simply left in its original location; it has been delivered
not for “safe custody” but only for “parking” and nothing
more.
Compare with:
•
P left keys in ignition so that the attendant could shift
the car within D’s downtown car-park facility.
•
D’s employee carelessly allowed a thief to remove P’s
car.
•
Did D have possession of P’s car so as to be liable as
bailee?
•
Held: Yes; actual possession of the car had been
delivered to D, creating a bailment for reward; this
was not a mere licence to occupy a space, as P had
handed over his keys (left them in the ignition at D’s
request) to allow the car to be moved around within D’s
facility at D’s election; D was thus liable.
49
- Sydney City Corporation v West (1965) 114
CLR 481 (HCA)
•
Customer could not remove car without first producing
a ticket issued by the car-park proprietor ® = passing
of possession ® = bailment ® = duty of care in
respect of the property/duty not to misdeliver the
vehicle into the hands of a thief.
•
P parked his car at a downtown Toronto car-park
facility owned by D.
•
He paid the evening flat-rate charge and received a
ticket on which there was an exclusion clause:
“We are not responsible for theft or damage of car or
contents, however caused.”
•
The ticket also showed the opening hours: 8 am –
midnight.
•
Moreover, at D’s request, P left the keys in his car.
•
P returned at 1 am, one hour after the park had closed,
only to find his car and some of its contents (clothing,
tape player, electric razor) missing.
•
Hotel customers gave their car keys to the night porter
at D’s hotel; garage care was an advertised service;
customers were charged a daily rate.
Evidence showed that D’s normal practice after
midnight was to leave customers’ keys with the night
porter in an office across the street; since P’s keys
were not there, they must have been left in the car’s
ignition.
•
The night porter, who had a history of dishonesty
offences, took P’s car without consent and wrecked it in
a crash.
Held: Ashby v Tolhurst principles were cited with
approval; there must be a “parting with possession”
— a delivery of possession to D.
•
Here the indicia of control, in favour of a bailor–bailee
relationship, were many and quite strong:
- Adams (Durham) Ltd v Trust Houses Ltd
[1960] 1 Lloyd’s Rep 380
•
Held: A contract of bailment arose and D was under an
obligation to take all reasonable care of P’s car.
- Heffron v Imperial Parking Co (1974) 3 OR
(2d) 722
- Shorters Parking Station Ltd v Johnson
[1963] NZLR 135
•
•
It is the same, for example, if you pay a fee for placing your clothes in a provided
locker space while you go for a swim at the beach. This is likely merely a licence
for you to use the property (occupy the locker space) for a specific purpose.
Compare Greenwood v Municipal Council of Waverley (1928) 28 SR (NSW) 219.
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- Keys were delivered so that D’s attendant could
move the car;
- The ticket issued had a serial number, suggesting
that it needed to be presented by P before the car
was released (ticket system);
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- Provision of an attendant showed that the business
was more than just money for parking a car;
- The parking lot was closed at midnight but no
conditions were imposed concerning the removal of
the cars beforehand; and
- D’s practice was to deposit owner’s keys with the
night porter at the end of the day,
•
•
All this indicted a relationship quite different from that of
a licence passively granted by D as a licensor to P
(Ashby v Tolhurst was therefore distinguished).
•
Note also that D was bailee not only of P’s car but also
of the items of personal property inside it, even
though D did not specifically know of the items; the
items were not unusual but rather of the general kind
and quantity of such goods that might reasonably be
expected to be regularly carried in a car’s body or
trunk; such items were thus constructively included
within the bailment arrangement.
- However, modern courts and commentators
tend to deny that the bailor’s consent to the
transfer of possession is necessary; all that
really matters is the bailee’s consent; it
suffices that the bailee had voluntarily
assumed possession of another’s goods (i.e.,
in order to owe to that other, the duties of a
bailee).52
5.
“Bailment” can be distinguished from other
transactions:
• Although possession may consensually be
transferred from A to B, that does not necessarily
create a bailment. What alternatives are there
when goods change hands?
Continuing on with “key concepts” of bailment …
CONSENT
- Bailor must authorize/consent to bailee’s
possession of the goods, expressly or
impliedly.50
SALE
S transfers for value his or her
ENTIRE interest to B (no intention
to return the thing in specie).
LICENCE
Consent without CONTROL.
- Consent of the bailee is also required (i.e.,
possession must be voluntarily assumed).51
50
51
e.g., Ashby v Tolhurst (above)
Bailor consent would be implied (for example) in a “finding” situation (where his
or her goods are taken into the care and control of the finder), or if the bailor
were rendered unconscious and taken to hospital (where personal items are
then taken from his or her body for safekeeping). It might also be implied where
the bailor engages in “risk-assumption” like illegally parking his or her car, so that
a bailment results when the car is towed away to avert a continuing trespass to
the occupier’s land.
This is not to say that the bailee need be happy about it, but he or she must be
willing to take the property of someone else. As discussed earlier, this assumes
knowledge and consent of the bailee. A person does not become a bailee of
goods concealed in another item when the unconcealed item is delivered to
them and that person would not consent to receiving the hidden items if they had
known of them. It is similar if a person receives unsolicited goods. That person
does not become a bailee. She or he may become what is sometimes called an
“involuntary bailee”, whose duties in relation to the goods are minimal, but not
DEBT
52
Relationship of “debtor” and
“creditor” — i.e., a personal
absent altogether. An involuntary bailee must still do what is “right and
reasonable in all the circumstances”: Da Rocha-Afodu v Mortgage Express Ltd
[2014] EWCA Civ 454; [2014] 2 P & CR DG 1 [50] (Arden LJ, Jackson and Sharp
LJJ agreeing); Campbell v Redstone Mortgages Ltd [2014] EWHC 3081; [2015]
1 P & CR DG 18.
See, e.g., The Pioneer Container [1994] 2 AC 324, 341–2; WD & HO Wills
(Australia) Ltd v State Rail Authority of New South Wales (1998) 43 NSWLR
338, 353–4; East West Corpn v DKBS AF 1912 A/S [2003] QB 1509 [24]; Palmer
on Bailment (3rd ed, 2009) [1-012]; Cambridge v Anastasopoulos [2012]
NSWCA 405 [13].
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bailment: property in the goods passed; the miller was
therefore insured against the loss.
obligation for the repayment of a
fixed sum of money.53
TRUST
- Chapman Bros v Verco Bros & Co Ltd (1933) 49
CLR 306: identity of goods was destroyed on
delivery; identity must be preserved
“Bailment on trust” — no title
passes: the term “trust” here merely
defines the bailee’s duty towards
the bailor (i.e., can’t treat the goods
as his or her own but must respect
the bailor’s superior title).
Illustrations from the case law:
•
Wheat farmers in South Australia were in the practice of
delivering bags of wheat to merchants.
•
Pending being purchased or on-sold by the merchant, it was
simply stored.
•
However, immediately upon delivery the bags of wheat were
“confused with” the bags of wheat supplied by other farmers;
they were all stacked in a single pile in the same-looking
bag, making identification of individual deliveries impossible
— the identity of each farmer’s wheat was destroyed at that
moment.
•
Also, the conditions of storage stated: “The purchaser shall
not be required to return identical wheat.”
•
When the merchant in this case went into liquidation, the
farmer sought to recover its wheat, which was still being
stored in the merchant’s premises.
•
The liquidator claimed the wheat as its own and the farmer
claimed it was a bailment.
•
Held: Randell followed; because the wheat could never be
returned in specie, property had passed to the merchant
immediately upon delivery; the farmer was, therefore, merely
an unsecured creditor.
- The South Australian Insurance Co v Randell
(1869) LR 3 PC 101
•
Farmers delivered wheat to a miller.
•
The wheat was mixed with other customers’ wheat (and
so lost its identity) — like money deposited in a bank —
and formed part of the miller’s stock that he could dispose
of as he wished.
•
The farmers could demand an equal quantity of wheat or its
market price.
•
Fire destroyed the mill and the stock.
•
The insurance policy excluded “goods held on trust” unless
subject to specific coverage (which it wasn’t).
•
The miller claimed on the insurance policy and so the issue
arose: was the wheat the miller’s property (i.e., outright
sale and passing of title, therefore insured), or was it held
“on trust” for the farmers (i.e., the miller was a bailee only
and not insured)?
•
53
“The arrangement is inconsistent with the very idea of
bailment according to English law, which involves the
redelivery of a specific thing in its original or some altered
form to the bailor or to some other person in accordance
with the terms of the bailment. … I am unable to understand
how there can be a bailment of a thing which does not
remain identifiable.”
Rich J
Held: The miller was not a mere bailee; the wheat was not
delivered simply for storage purposes — it was used as
part of the current stock or capital of the miller’s trade; it
was therefore transferred for value = a sale and not a
This commonly arises where a customer deposits money at a bank (compared to
depositing a valuable item in a safety deposit box). The bank must repay an
equivalent sum but it is not obligated to return the same notes that were
deposited. The money deposited thus becomes the bank’s money (part of its
current capital), which the bank can dispose of as it wishes. See Evans v
European Bank Ltd (2004) 61 NSWLR 75 [165]. Compare, though, where you
give your notes and coins to a security firm to carry to the bank for deposit:
Brambles Security Services v Bi-Lo Pty Ltd [1992] Aust Torts Reports ¶81-161.
6.
The categories of bailment are probably not closed
and can be expected to adapt to modern commercial
needs (or “the pressures and stresses of modern legal
necessity”).
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The original classification of bailments has been around
since at least the early eighteenth century (see Coggs v
Bernard (1703) 92 ER 107):
- gratuitous deposit for safekeeping
(depositum);
- gratuitous loan (commodatum);
- loan for hire (locatio et conductio);
- goods delivered as a pawn (vadium);
- delivery of goods for reward to do something
with them (e.g., carriage);
- delivery of goods without reward to do
something with them (mandatum — an
obligation that arises by mandato).
7.
- Motor Mart Ltd v Webb [1958] NZLR 773
•
Purchase price: £944;
Deposit: £125;
Balance in eight monthly instalments;
Property in the vehicle not to pass until fully paid for.
•
D defaulted on payments and P repossessed the truck and
claimed its value (it had depreciated).
•
D argued (heard as a preliminary question) that the agreement
was void under the Hire Purchase and Credit Sales
Stabilisation Regulations, which required a one-third deposit at
the time of signing the agreement; the regulations defined a
“hire purchase agreement” as an agreement for the bailment
of goods under which property in the goods may pass to the
bailee.
•
•
•
However, Turner J held that the absence of an obligation or
undertaking to redeliver the goods is not fatal to the concept of
a bailment; for bailment, it suffices simply that there is
possession severed from ownership (which is what obtained
here: until the truck was fully paid for, the buyer had
possession while the seller retained ownership); a “redelivery”
obligation is not an essential requirement.
•
But P’s counsel went further still and argued that there cannot
be both a “sale” and a “bailment”, which argument was also
rejected by Turner J: sale and bailment are not necessarily
inconsistent with each other: if instalments are not paid, the
goods go back to the bailor under the terms of the bailment,
but if the goods are paid for, the bailment ends. So, on sale,
the bailment simply ends.
In order for there to be a bailment, it suffices that there
is POSSESSION severed from OWNERSHIP (on
some sort of lawful basis).
• Normally the question of whether “possession” has
passed to the alleged bailee is straightforward on
the facts; however, in some cases the question of
whether a party has acquired sufficient possession
or control to be constituted as “bailee” is nuanced
and requires a careful balancing of the facts.
A car dealer (P) sold a truck to D on terms:
-
•
Consider:
P argued in response that there was no bailment because P
and D were “vendor and purchaser” and not “bailor and bailee”.
In fact, as Turner J pointed out, they were really conditional
vendor and purchaser, because the passing of property/title
was dependent on all the payments being made.
P’s counsel also argued that a bailor must have a superior
title, a corollary of which was the reservation of a right to
redelivery of the goods at the end of the bailment; but here,
if the bailee paid off all the instalments, there would be no
redelivery to the bailor.
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- Shipbuilders Ltd v Benson [1992] 3 NZLR 366
•
P’s motor launch was hauled out of the water by D and stored in
D’s boatshed (covered slipway) for repairs.
•
The repairs were mostly undertaken by P, not D.
•
The launch was destroyed by a fire that broke out at D’s shed,
the cause of which fire could not be determined.
•
P sued D (through their respective insurance companies) for the
value of P’s launch: P alleged that D was bailee and hence owed
a duty of care in relation to the safe storage of the vessel, which
duty it failed to discharge.
•
The problem for P, though, was there was shared occupation
of the boatshed — P had access in order to do the repairs, and
in fact had worked on the vessel, including on the day of the fire
— and so there was a real question as to whether D had
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assumed sufficient control (hence possession) of the vessel
so as to constitute itself as “bailee” of P’s goods.
•
Notice the steps the Court needed to take to establish D’s
liability:
remove the vessel without payment of D’s fee and the use
of D’s facilities and equipment.
•
1. Establish that D was a bailee (control of the goods
required) Þ apply common-law definition of “possession”;
2. Determine the duty/standard of care owed by D as a
bailee;
2. – 3. Standard of care and onus of proof
•
An important factor in determining whether D had met its
standard of care is the onus of proof: the trial judge had
treated the onus as being on D (bailee) to show that it
had taken all reasonable care; the usual basis for this is
grounded in “common sense” — i.e., the bailee knows all
about it; he or she is in charge; he or she must explain,
the bailor having no opportunity of knowing what
happened.
•
But here, the bailor (P) was present as well, and so the
Court said that the individual facts may require a subtler
approach: i.e., P was frequently on the premises and had
responsibilities himself (e.g., keep the immediate area
clean; no smoking after 4 pm; etc.); the Court thought that
these facts had to be weighed in deciding whether D had
exercised reasonable care, so as to avoid too high a
burden being placed on D.
3. Determine whether D’s conduct met the required standard
(onus generally shifts to D to show this);
4. Consider the effect of any disclaimer, exclusion or limitation
clause on D’s liability (relevant mostly in contractual
bailments).
•
Applying those steps:
1. Control/Possession
•
The Court applied the following statements in Zweeres v
Thibault, 23 A 2d 529, 532 (1942) (Vermont SC):
“Where personal property is left upon another’s premises
under circumstances from which either relation [licence or
bailment] might possibly be predicated, the test is
whether or not the person leaving the property has
made such a delivery as to amount to a
relinquishment, for the duration of the relation, of his
exclusive possession, control, and dominion over the
property, so that the person upon whose premises it is
left can exclude, within the limits of the agreement, the
possession of all others. If he has, the general rule is
that the transaction is a bailment. On the other hand, if
there is no such delivery and relinquishment of exclusive
possession, and his control and dominion over the goods
is dependent in no degree upon the co-operation of the
owner of the premises, and his access thereto is in no way
subject to the latter’s control, it is generally held that he is
a [licensee] of the space upon the premises where the
goods are kept. … In a doubtful case consideration should
be given to the manifested intention of the parties, whether
the care of personal property or only the rental of a place
to put it was contemplated.”
•
Weighing up all the factors in this case, it was a fairly
close call either way (i.e., finely balanced); but the Court
held that it was not inconsistent with the existence of a
bailment that P had access from time to time to carry out
maintenance work, because that access was controlled
by the provision of a key and regulated by D’s rules,
under D’s employees’ supervision; also, P couldn’t
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Thus, it was a contract for storage — a bailment —
rather than just for handling and space occupancy (a
licence).
Þ The Court cited the comments of Atkin LJ in The
“Ruapehu” (1925) 21 Ll L Rep 119 and 310 (at 315–
16), who pointed out that where the bailee is present
(e.g., during working hours), the onus is on the bailee
to show that they fulfilled their duty of care (thus, it’s
for D to show that he or she wasn’t responsible); but,
at other times when only the bailor is present, the
onus remains on the bailor to establish that the loss
was caused by the bailee’s negligence (i.e., it’s for P
to show that D was responsible).
Þ The facts here, of course, weren’t so extreme, but
nevertheless there was a SHARED OCCUPATION of
the premises; so, the Court stated that, in deciding
whether the standard of care had been met, the
entire onus cannot be thrown upon the bailee; the
bailor’s responsibilities must also be considered (e.g.,
the bailee shouldn’t have to prove that the floor was
clean at the time when the bailor was there and had
responsibility to keep the floors clean).
• In terms of what the bailee must prove under its onus of
proof, the Court said:
Þ Bailee is not required to identify the cause of the
damage and negative fault in regard to that
particular cause: it may be difficult to establish how
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the damage happened and there may be different
possibilities (e.g., if there’s a fire, one may only
speculate as to how it started).
Þ If the cause is unknown, the bailee can negative fault
by establishing that its general conduct and
practices were reasonable.
Þ If the cause is known, then the reasonableness of
the bailee’s conduct may be assessed in relation to
that particular cause.
an independent transaction (for which no
part of the consideration is apportioned), it will
be “gratuitous”.
• What CONSEQUENCES follow from the distinction
between gratuitous bailments and bailments for
reward?
• Held: Had it been necessary to decide the point, the Court
would have considered the bailee not negligent on the
facts; but it was not necessary to decide because of the
fourth and final step: considering the effect of any
disclaimer or exclusion clause. Even if D had been
negligent, the exclusion of liability absolved it (“Vessels
stored at owner’s risk. All care taken, no responsibility” —
the Court said this expression was “the very antithesis of
acceptance of a legal obligation to take reasonable care”).
Some Specific Considerations:
Þ There are two main consequences:
i.
If the bailment is gratuitous, the bailor’s
action will sound in tort and not contract
(usually the tort of negligence):
Þ Accordingly, the bailee may avail itself
of defences in tort (e.g., volenti non fit
injuria and contributory negligence).
Illustrations from the case law:
- Walker v Watson [1974] 2 NZLR 773
a. “GRATUITOUS” Bailments and Bailments “for
REWARD”:
• To distinguish between these types of bailment,
ask: “Does the party accommodating the other
receive a corresponding benefit?”
• The “benefit” concerned is usually money, but
sometimes there is no separate and identifiable
charge for the bailee’s services.
•
A sports car was lent by the owner to a drunken
friend who damaged the vehicle in a crash.
•
The bailee furnished no consideration to the owner
for the loan of the car = a gratuitous bailment.
•
One consequence of this was that the action
sounded in tort and not contract.
•
Another consequence was that because the owner
had lent his car to a person whom he knew to be
intoxicated, the bailee had a defence of volenti —
the owner had voluntarily assumed the risk of
damage caused by the bailee’s negligent driving.
- Southland Hospital Board v Perkins Estate
[1986] 1 NZLR 373
• Consider “incidental” bailments (e.g., restaurant
offers cloakroom facilities but no separate charge;
bus carries passenger and bags, but no separate
charge for the bags):
Þ If the bailment is part of the service it will be
“for REWARD” (i.e., covered by the fare); if it is
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•
Walker v Watson followed.
•
A public hospital was responsible for taking charge
of a patient’s personal effects after she had died, but
one of her rings went missing.
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•
- the value of the bailed goods;
- the location of the place of bailment
(compare an unlocked barn in the
countryside with an unlocked warehouse
on an industrial estate in the city);
- the quantum of fees (if any) paid by the
bailor;
- the bailor’s knowledge of the
circumstances of the storage;
- the practicality of adopting the required
security measures; and
- the history of problems associated with
the storage location (e.g., thefts,
burglaries, floods).54
This was a gratuitous bailment and any breach of
duty thus lay in the law of tort.
- Compare: Skyway Service Station Ltd v
McDonald [1986] 1 NZLR 366
•
P paid D $30 to park his vehicle on D’s premises
near Auckland International Airport for 14 days.
•
P’s car was broken into, damaged, and certain
internal contents were stolen.
•
Clearly a contract of bailment.
•
Note Sinclair J’s obiter remark about volenti, even
though this was a bailment for reward/contractual
bailment:
“[I]f there are continuing arrangements made
between a particular bailor and bailee under which
the bailor becomes patently aware that there are
certain risks attached to the goods being stored in a
particular way, then it may be that there is evidence
available from which it could be found that the
bailee’s responsibility is diminished or
extinguished.”
ii.
• The modern formulation of the standards
applicable to each type of bailment is as
follows:
Bailees for
REWARD
The Standard of Care (owed by the bailee to
the bailor):
• Historically, the standard was “negligence”
for bailees for reward but “gross
negligence” for gratuitous bailees.
GRATUITOUS
Bailees
• But the modern approach has been to deemphasize the distinction and to favour a
general negligence-style duty based on
the particular circumstances. So, consider
each case on its INDIVIDUAL FACTS and
merits = a more flexible, case-by-case
approach.
Þ So, one would make a global
assessment of such matters as:
“NEGLIGENCE” (i.e., the
exercise of reasonable care for
the safety of the chattel in the
circumstances)
“Care that a REASONABLE
PERSON would use in looking
after HIS or HER OWN
CHATTELS of the SAME KIND
and IN THE SAME
CIRCUMSTANCES”55
(approximates ordinary
negligence)
“[T]he standard of care required in a case of bailment, or any
other type of case, is the standard demanded by the
circumstances of that particular case. It seems to me that to
54
55
Compare Tottenham Investments Pty Ltd v Carburettor Services Pty Ltd [1994]
Aust Torts Reports ¶81-292, 61,554 (Kirby P).
But note how Windeyer J, in Hobbs v Petersham Transport Co Pty Ltd (below),
states this as the standard for a bailee for reward!
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try and put a bailment, for instance, into a watertight
compartment — such as gratuitous bailment on the one hand,
and bailment for reward on the other — is to overlook the fact
that there might well be an infinite variety of cases, which might
come into one or the other category. The question that we have
to consider in a case of this kind, if it is necessary to consider
negligence, is whether in the circumstances of this particular
case a sufficient standard of care has been observed by the
defendants or their servants.”
Houghland v Low (Luxury Coaches) Ltd
[1962] 1 QB 694, 698 (EWCA) (Ormerod LJ)56
the bailor’s loss (i.e., the loss would have
occurred even if the bailee had taken due care); or
c. Where applicable, show that the bailor is bound
by an exclusion clause that covers the bailee’s
causative negligence.
Illustrations from the case law:
- Conway v Cockram Motors (Christchurch) Ltd
[1986] 1 NZLR 381
b. The Onus of Proof:
Standard Chain of Analysis:
1. BAILOR establishes:
•
P left a $55,000 BMW motorcar in D’s showrooms on
consignment (i.e., for selling to the public).
•
A thief broke into the premises; the ignition keys were on the sun
visor and the car was left unlocked (as a fire precaution).
•
The thief couldn’t get out of the showroom to the yard outside
because of the bi-fold doors and a safety chain across the
driveway to the street.
a. EXISTENCE of a BAILMENT; and
b. LOSS or DAMAGE to the GOODS (during the
course of the bailment) or FAILURE to
REDELIVER THEN IN SPECIE.
•
So, the thief used the BMW as a battering ram to get outside.
•
Although the car was later recovered, it was in a badly damaged
condition.
•
2. ONUS then shifts to BAILEE (or, where applicable, a
sub-bailee) to NEGATE LIABILITY, which she or he
may do in one or more of the following ways:
D, as bailee, could only avoid liability by showing either that it
took reasonable care of P’s goods in all the circumstances, or
that its failure to do so did not contribute to the loss.
•
Held: D was liable (it could not discharge its onus of proof); “the
obligations of a gratuitous bailee and of a bailee for reward are so
nearly identical that it is unnecessary to determine into which
class [D] fell”; D wasn’t negligent simply for leaving the car
unlocked and the keys within easy access (this was a common,
virtually universal practice, in the industry, i.e., to safeguard stock
in the event of fire); but, because it was such a common practice,
D’s precautions against theft had to be judged from the standpoint
of the intruder with that knowledge.
•
On the facts, although there were bi-fold doors, a safety chain and
the premises were well-lit, there was no alarm system, and the
subject matter of the bailment was valuable and a highly
attractive temptation to thieves.
•
D was thus liable; it couldn’t show that it had taken reasonable
precautions against the foreseeable outcome of theft in all the
circumstances.
a. Establish that all reasonable precautions were
taken (i.e., no fault); or
b. Even if there was fault, there was no causal
connection between the bailee’s negligence and
56
Regrettably, some modern authorities still contain statements suggesting that
differential standards of care exist as between gratuitous bailments and
bailments for reward. For example, in Terry Hogan Prestige Cars v Opera
Investments Pty Ltd [2006] NSWCA 139, the Court clearly states that “the
standard of care is higher [in bailment-for-reward situations] than for an
involuntary or gratuitous bailment” ([21]). This was not a considered remark,
however.
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- Hobbs v Petersham Transport Co Pty Ltd (1971)
124 CLR 220 (HCA)
•
P engaged D, a private contractor, to transport valuable electrical
equipment by road in NSW.
•
D never took custody of the goods; instead, it sub-contracted to a
third-party private carrier (Hobbs bros) to do the work.
•
Hobbs bros’ vehicle, which was in good condition and well
maintained by an experienced mechanic, suffered a “clean-break”
fracture of the axle, on level ground, while travelling at
approximately 25mph; the truck overturned and P’s goods were
irreparably damaged.
•
P sued D for delivering the goods in a damaged condition.
•
Held: D was not liable.
•
Menzies J (McTiernan J agreeing): Treated D as P’s bailee (for
reward) — the third party was merely a “servant” of D; bailee’s
duty to redeliver the goods is not absolute but rather qualified: if
D could show that failure to redeliver was not caused by its or its
servant’s negligence, then D is not liable.
•
Here, D could not prove that the axle that had broken had been
inspected; but that was ultimately of no consequence, as even if
an inspection had occurred, no reasonable examination would
have revealed a latent problem with the axle; therefore, D was
able to show that non-delivery of the goods in specie was not due
to its fault.
•
WIndeyer J: The sub-contracting to Hobbs bros was impliedly
authorized by the agreement between P and D, but because D
never took custody of the goods, D never became bailee (i.e.,
not a sub-bailment arrangement (P ® D ® Hobbs bros), but
rather a straight bailment P ® Hobbs bros (Hobbs bros had
merely collected the goods from the wharf, albeit under the
supervision of D’s employee/manager)).
•
Note the discussion of onus of proof: the persuasive burden
shifts upon proof of bailment and loss or damage to the goods (it’s
not merely an evidential burden created upon proof of a “prima
facie” case, like res ipsa loquitur); this is a peculiar incident of
the law of bailment — a sui generis body of law — that is too
firmly established to be disturbed by the demands for logical
consistency with the consequences of res ipsa loquitur in other
circumstances.
•
But because D wasn’t a bailee, the onus of proof didn’t shift — it
was a simple “breach of contract” case: Did D breach its implied
promise to P that the goods would be carried to their destination
with due care? If D procured someone else to perform the
carriage for it, it became vicariously liable for the sub-contractor’s
negligence [Correct? Sounds more like a case of non-delegable
duty.]
•
P thus had to show that Hobbs bros’ vehicle was negligently
driven or negligently maintained, but P was unable to do so: the
latent defect in the vehicle was not discoverable by reasonable
inspection; if Hobbs bros could not be shown to be negligent, D
could not be liable for breach of its implied contractual promise
either.
c. Bailments “AT WILL” and “FOR A TERM”:
BAILMENT
AT WILL
“A carrier to whom goods are delivered for carriage is a bailee. But
a person who undertakes that he will carry goods is not a bailee of
them unless they be actually delivered to and received by him.”
•
Hobbs bros were thus bailees (for reward) of P even though there
was no contractual privity between them:
BAILMENT
FOR A TERM
“It is now beyond dispute that the relationship of bailor and bailee of
a chattel can arise and exist independently of contract.”
•
Therefore, Hobbs bros would be directly liable to P if they failed
to take due care of the goods, but they weren’t sued; D was.
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Bailor is entitled to IMMEDIATE
RETURN of the goods ON
DEMAND.
– This gives the bailor an
IMMEDIATE RIGHT TO
POSSESSION (which affords
sufficient standing for an action
in conversion and (possibly)
trespass).
If the bailee provided consideration,
he or she may be entitled to keep
the goods for a specified period.
– This gives the bailor a
QUALIFIED RIGHT TO
POSSESSION only (which is
insufficient to bring an action
based on possessory rights).
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the bailee would become the owner (like Motor Mart v
Webb).
• Note that what starts off as a bailment for a term
may CONVERT TO a bailment “at will” (e.g., the
term or purpose of the original bailment has
expired; or the bailee destroys the basis of the
contract of bailment, or otherwise repudiates or
disclaims it).
•
Here, the bailor (owner) was suing the auctioneer in
conversion; although he had no actual possession, he
could succeed if he showed an immediate right to
possession at the time of sale by the auctioneer.
•
The problem for the bailor here, though, was that the sale
occurred on 22 February 1973, but the bailor didn’t serve
notice of default and claim to recover the car until April
1973; so, if there was a bailment for a term in February,
the owner would only have had a qualified right to
possession.
•
However: The bailee (purchaser) was in default of the
agreement and the default was a MAJOR breach:
- Changed registration number;
- Sold the car when it was still owned by the bailor;
- Bailee’s conduct was fraudulent and amounted to a
criminal offence (bailee was ultimately imprisoned).
•
Roskill LJ applied the principle:
Illustrations from the case law:
- Manders v Williams (1849) 4 Exch 339 (expiry
of term or purpose)
•
A customer receiving casks of porter (a type of beer) from a
brewer was obligated to return them when empty and in
any event within six months.
•
The sheriff seized and sold them (i.e., the 300 casks lying
empty in the customer’s cellar).
•
The brewer needed to establish that its rights to
possession were violated.
•
Held: When the casks were full, the customer has an
interest in them; but once empty, then even though the six
months had not expired, the right to possession had
reverted to the brewer.
•
From the customer’s perspective: At that point, the
customer became a “mere bailee during pleasure” (i.e., a
bailee at will).
•
From the brewer’s perspective: From that point on the
brewer enjoyed an immediate right to possession, so
there was a bailment at will.
- Union Transport Finance v British Car
Auctions [1978] 2 All ER 385 (bailee
destroying the basis of the contract of
bailment)
•
The purchaser under a hire-purchase agreement unlawfully
sold a car through an auctioneer.
•
Note: If the bailee under the hire-purchase agreement had
observed the terms of the agreement and paid the
instalments on time, during the hire-purchase period = a
bailment for a term. At the end of the term, if bailee had
observed all the conditions, the bailment would end and
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“[I]f the bailee acts in a way which … destroys the basis of
the contract of bailment, the bailor becomes entitled at
once to bring that contract to an end, and thus at once
acquires the right to immediate possession of the article
bailed.”
•
The consequence of this was that the bailor had an
immediate right to possession and the bailee became a
bailee at will; it therefore had standing to sue the
auctioneer in conversion even though, at the time of the
wrong, the hire-purchase agreement hadn’t yet been
terminated.
•
Note: The contract stipulated that the bailor had to give
notice of default, which it didn’t do because in February it
was unaware of the bailee’s misconduct. However, the
Court held that the bailor’s right to terminate the contract
was separate and in addition to its rights at common law
(and the contract would have to be very clear to deprive
the bailor of rights sourced in the legal relation of bailor–
bailee).
•
Thus, the suggestion appears to be that the “property” and
the “contract” principles are operating independently of
each other!
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• The late Professor Palmer, in his big and
celebrated book on Bailment (2nd ed, 1991), at
989, suggests that the Union Transport Finance
principle applies whenever there is a “deviation” or
a “radical departure from the method of
performance agreed upon in the contract”.
• However, the New South Wales Court of Appeal, in
the following case, disagreed:
Þ
A deviation short of repugnancy or
disclaimer of the bailment does not mean
that the bailee loses all title based on
possession, and so the bailee may still sue
third parties for wrongs committed against
that title.
•
The car was then stolen from TM’s premises, never to be
seen again.
•
TM’s security practices were lax: they kept the keys to the
car in their office just hanging on a wall board — easily
accessible to thieves.
•
AG went into liquidation. The liquidator, by selling up the
other assets, managed to pay out Esanda for the debt and
then sued TM for a breach of the bailment.
•
TM argued that AG had no standing to sue, as they as
bailees had allowed the car to go out of their possession —
that this was a serious breach of contract that brought the
bailment to an early end, meaning that only the bailor,
Esanda, had standing to sue: the immediate right to
possession was thus in Esanda, the bailor, and not in AG.
•
Held: There may well have been a serious breach of
contract through AG’s failure to get Esanda’s written
permission to the attempted sale of the car through TM; but
even if the contract came to an end, that does not
necessarily mean that the bailment also came to an end —
that requires not merely a fundamental breach of contract
(like a deviation from its terms), but rather a repudiation of
the bailment itself — an act of repugnancy to or
inconsistency with the bailment (or a disclaimer of the
bailment); a deviation from the bailment short of disclaimer
of the bailment does not cause the bailee to lose his or her
right to possession.57
•
Here, what AG did was not inconsistent with or repugnant
to the bailment; it was not like the bailee’s fraudulent
conduct in Union Transport Finance v British Auctions;
AG’s breach was technical only: they had told Esanda of
their intention to sell and received a pay-out figure; Esanda
therefore knew all along and they tacitly assented over the
telephone; there was complete disclosure.
•
So, what AG had done was not substantively something
that could be construed as a complete disclaimer of the
bailment, repugnant to its very existence; the upshot, then,
was that AG (represented by its liquidator) had not lost its
immediate right to possession at the time of the theft, and
so they could sue TM for breach of its duty as bailee
(negligence or breach of contract).
- The Anderson Group Pty Ltd v Tynan Motors
Pty Ltd (2006) 65 NSWLR 400
•
The plaintiff, AG, entered into a hire-purchase agreement
to purchase a very expensive Mercedes motor vehicle over
a five-year term. The purchase was financed by Esanda
Ltd.
•
The contract contained all the usual terms: hirer had
possession, Esanda ownership; possession may be
retained provided terms of the agreement are met; after
five years, the hirer may buy the car for its residual value or
return it to the company; etc.
•
One condition of the contract was that the hirer was not to
part with possession of the motor vehicle without the prior
written consent of the owner, Esanda.
•
Fairly early on into the bailment term the Director of AG
phoned a representative of Esanda and explained that AG
was struggling financially and was intending to sell the
Mercedes. He asked for an indicative pay-out figure for the
motor vehicle so that he knew what he had to sell it for to
pay out the contract.
•
The Esanda representative advised the pay-out figure and
AG then took the car to TM, where it was placed on
consignment for sale.
57
And so, like Union Transport Finance, even though the contract may be ended,
that does not mean that the bailment is necessarily ended, as bailment is not, at
the end of the day, dependent on the existence of a contract. Ultimately,
bailments exist and subsist independently of any contract.
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- Penfolds Wines Pty Ltd v Elliott (1946) 74
CLR 204 (HCA)61
Property Rights of the Bailor and Bailee
a.
The BAILOR’S Property58 Rights (against bailee and
third parties):
•
Penfolds was wine producer and seller; Elliott was a
licensed hotelier carrying on business at a hotel in NSW.
•
Elliott had the misfortune one day of selling and
delivering, to a man named Moon, two bottles of bulk
wine (the wine being contained in Penfolds bottles); Moon
was a pure food inspector and an employee of the Brand
Protection Association.
•
Elliott had received the bottles (empty) from his brother,
who had acquired them (when they contained Penfolds
wine) from a local bottle store, who had acquired then
from Penfolds.
•
The bottles were embossed on the bottom: “This remains
the property of Penfolds Wines Limited”; and so, all that
Elliott’s brother acquired was ownership of the wine in the
bottles, not ownership of the bottles themselves — these
were merely bailed to him. So (and ignoring the local
bottle store, who did not figure in the litigation), when
Elliott’s brother delivered possession of the bottles to
Elliott, Elliott effectively became a sub-bailee of the
bottles.
•
Penfolds argued that by refilling the bottles with nonPenfolds wine, Elliott (the hotelier) was committing
trespass against their property in the goods (i.e., the
simple handling of the chattel without consent or
authority); they argued that they had standing to sue in
trespass because Elliott’s brother’s act of delivering the
bottles to Elliott for this purpose was an act repugnant to
an express term of the bailment, which (the Court agreed)
brought the bailment to an end, thus giving Penfolds an
immediate right to possession of the bottles (which then
gave them standing to sue Elliott).
•
Penfolds also argued that Elliott committed conversion
when (inter alia) he sold and delivered the bottles to Moon
for the purpose of allowing him to take them away (i.e., =
dealing with the chattels in a manner repugnant to the
bailor’s immediate right of possession).62
TRESPASS*
Bailor must have
possession, either actual
or an immediate right
thereto.
CONVERSION
DETINUE
Bailor must have an
immediate right to
possession.59
NEGLIGENCE
Possession OR
ownership will suffice.60
*
58
59
60
Query whether ACTUAL possession is
necessary to support an action in trespass, or
does an IMMEDIATE RIGHT to possession
suffice?
Obviously, in a contractual bailment the bailor will enjoy contractual rights as
well (at least against the bailee), but here we are only concerned with the bailor’s
“property” rights per se.
As the Queensland Court of Appeal made clear in The Premier Group Pty Ltd v
Followmont Transport Pty Ltd [1999] QCA 232 [7]; [2000] 2 Qd R 338, 344, the
right to sue in detinue turns not on ownership but rather on “a higher possessory
right than the person from whom return of the goods is sought”.
See, e.g., Candlewood Navigation Corporation Ltd v Mitsui OSK Lines Ltd (“The
Mineral Transporter”) [1986] AC 1 (PC); Leigh and Sillavan Ltd v Aliakmon
Shipping Co Ltd [1986] AC 785 (HL).
61
62
See especially at 226–8 per Dixon J. See also Bunnings Group Ltd v CHEP
Australia Ltd [2011] NSWCA 342.
Dixon J (at 229) described conversion thus: “The essence of conversion is a
dealing with a chattel in a manner repugnant to the immediate right of
possession of the person who has the property or special property in the chattel.
It may take the form of a disposal of the goods by way of sale, or pledge or other
intended transfer of an interest followed by delivery, of the destruction or change
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•
Diagrammatically:
Reservation of title
64
Conversion?
Penfolds
Elliott’s brother
Elliott
Owner/bailor
Bailee committing act of
repugnancy, ending bailment
Sub-bailee
Moon
Purchaser of
refilled bottles
•
Penfolds sought an injunction to prevent the practice
(which would make an example of Elliott and deter the
practice within the industry, which practice was
widespread in Australia at the time).
•
Held: Penfolds won (although their victory was a Pyrrhic
one only): All judges except Latham CJ considered there
to be no trespass; all judges except Dixon J held that a
conversion had occurred; but a plurality of the judges
(three) refused to award an injunction; the two judges who
found liability held that this was not a proper case for an
injunction — the infringement was just too petty, and so
Penfolds was left to its common-law remedy of
damages.63
•
63
•
Trespass?
- Compare Wilson v Lombank Ltd [1963] 1 All
ER 740
Dixon J: The general rule is that an immediate right to
possession is insufficient to support an action in
trespass (although it suffices for conversion or detinue);
however, an exception obtains where the person whose
actual possession was violated held the property as
servant, agent or bailee under a revocable bailment
(i.e., a bailment at will) for, or under, or on behalf of the
person having the right to possession (the employer,
principal or bailor, respectively); but even here the
“correct view” is that the right to possession as a basis
for suing in trespass “is merely a right in one person to
sue for trespass done to another’s possession”.64
of the nature or character of the thing, as for example, pouring water into wine or
cutting the seals from a deed, or of an appropriation evidenced by refusal to
deliver or other denial of title. But damage to the chattel is not conversion, nor is
use, nor is a transfer of possession otherwise than for the purpose of affecting
the immediate right to possession, nor is it always conversion to lose the goods
beyond hope of recovery. An intent to do that which would deprive ‘the true
owner of his immediate right to possession or impair it may be said to form the
essential ground of the tort’.”
To summarise: Latham CJ held there to be a trespass and a conversion, and he
awarded the injunction; Dixon J held there to be neither a trespass nor a
conversion (and so no injunction could follow); Starke J and McTiernan J held
that there was no trespass but a conversion occurred, but no injunction was to
be granted; Williams J held there to be no trespass but a conversion occurred
and that an injunction should be granted.
Latham CJ makes the sound point in his judgment that it makes no sense in the
case of a servant or agent to say that, vis-à-vis the master or principal
But the wrongdoer’s act must still be wrongful as against
the servant, agent or bailee; and here the act of Elliott,
the hotelier, was not wrongful (trespassory) as against his
brother, the bailee, as the former had received the bottles
with the latter’s consent/authority; accordingly, there could
be no interference with the bailee’s possession that
would enable Penfolds, the bailor, to sue for trespass to
the bottles based on its immediate right to possession
of them; thus, without a violation by Elliott of his brother’s
possession of the bottles, there was nothing to which the
above exception to the general rule could attach.
•
See the facts from earlier.
•
P was able to sue D in trespass even though, when
the goods were taken, the goods were in the
possession of a third party (the garage).
•
Hinchcliffe J held that “legal possession” remained
with P, the bailor, throughout (i.e., an immediate right
to possession is tantamount to actual possession and
so sufficient to found an action in trespass).
•
This is probably inconsistent with what Dixon J said
in Penfolds Wines; but query whether his “exception”
might nevertheless have applied to the facts of Wilson:
Þ
Because there was no lien on the part of the
garage, P enjoyed an immediate right to
possession of the motor vehicle; when D took the
vehicle from P’s bailee (the garage), this was a
wrong committed against the bailee’s
possession, for which the bailor could sue (i.e.,
“for trespass done to another’s possession”);
although the bailee technically consented to D
taking possession (which would ordinarily be a
defence to trespass), the bailee was reluctant to
surrender possession to D and only did so
(eventually) on the basis that D would “bear full
responsibility”.
(respectively), there is a wrong done to another’s possession, since
possession of a servant/agent within the scope of the employment/agency
relationship is the possession of the master/principal — the master/servant
never loses possession.
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CONVERSION:
• Note also that an owner out of possession may be
able to sue for permanent injury to his or
“reversionary interest” in the goods, i.e., for
damage that will remain when the goods are due
to be returned to the owner: Penfolds per Dixon J.65
Þ
• Depriving, without lawful justification, P of his or
her continuing possessory rights to his or her
goods67 by asserting, intentionally, a temporary
or permanent DOMINION over them in a manner
inconsistent with P’s possessory rights thereto68
— e.g., wrongfully taking, keeping, using, abusing,
destroying, altering, transferring, selling, pledging or
(in any other way) disposing of P’s goods.
This is not an independent action, notice, but
rather one that is parasitic on the principal
tort that occurred: trespass, conversion,
detinue (and so the owner must sue in one of
those nominate torts).
•
• Summary of the “property torts” (apropos
personal property):
Typically used where the goods cannot be
recovered (e.g., they have been destroyed).
DETINUE:
• Continuing wrongful retention of personal
property by D following a specific and
unequivocal lawful demand by P for return of the
goods.69
TRESPASS:
• Committing, without lawful justification, any
INTENTIONAL act of DIRECT PHYSICAL
INTERFERENCE with another’s POSSESSION of
goods.
65
66
•
Unaccompanied by an intention to exercise
DOMINION over the goods.
•
Typically used in cases where there has been
damage to the goods but no loss or destruction
(although the tort is actionable per se66).
67
68
This is the same as, or analogous to, the action of a landlord suing for
permanent injury to his or her reversionary interest in the land upon expiry of a
lease. See, e.g., the discussion in Lockwood Buildings Ltd v Trust Bank
Canterbury Ltd [1995] 1 NZLR 22.
In principle, there would seem to be no reason why the position should any
different than for trespass to land, although it is occasionally suggested that
trespass to goods may not be actionable per se: see Everitt v Martin [1953]
NZLR 298 (SC).
69
Conversion is limited to tangible personal property only; choses in action cannot
be “possessed” in the required sense: OBG Ltd v Allan [2008] 1 AC 1 (invalidly
appointed receivers held not liable in conversion for terminating, settling or
otherwise dealing with the plaintiff’s contracts, since contractual rights are not
capable of physical possession); Hoath v Connect Internet Services Pty Ltd
(2006) 229 ALR 566 (interference with intangibles such as the plaintiff’s domain
name, IP address and AS number could not amount to conversion). In the United
States, however, interference with a domain name has been held to capable of
constituting conversion: Kremen v Cohen, 337 F 3d 1024 (2003).
In Kuwait Airways Corp v Iraqi Airways Corp [2002] 2 AC 883, 1084, Lord
Nicholls of Birkenhead, while observing that “[c]conversion of goods can occur in
so many different circumstances that framing a precise definition of universal
application is well-nigh impossible”, went on to say: “In general, the basic
features of the tort are threefold. First, the defendant’s conduct was inconsistent
with the rights of the owner (or other person entitled to possession). Second, the
conduct was deliberate, not accidental. Third, the conduct was so extensive an
encroachment on the rights of the owner as to exclude him from use and
possession of the goods. The contrast is with lesser acts of interference. If these
cause damage they may give rise to claims for trespass or in negligence, but
they do not constitute conversion.”
For a recent example of detinue (and conversion), see Bunnings Group Ltd v
CHEP Australia Ltd [2011] NSWCA 342. Compensation was assessed in that
case on the basis of the damage suffered by the owner as a result of the lost
commercial opportunity to hire out the converted goods (pallets) to customers of
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•
•
ii.
Overlaps significantly with conversion in practice
(i.e., an act of conversion typically follows the
demand for return).
i.
P can either get damages and/or an order for
delivery up of the item if it is recoverable.
Against the BAILOR:
• Subject to statute (e.g., the Australian Consumer
Law), the common-law position may be modified
by contract (e.g., limiting liability).
• If the bailment is for a TERM, the bailee may have
POSSESSORY RIGHTS against the world,
including the BAILOR.
Illustration from the case law:
- Wilson v New Brighton Panelbeaters Ltd [1989] 1
NZLR 74
b.
THIRD PARTIES.
• Bailment under lien or pledge: bailee may sell the
goods if the bailor fails to pay the agreed sum to
the bailee.
•
P went to the beach one day with his family and left his car
parked in the carport at home (= a continuation of actual
possession of the car).
•
A thief phoned D, a towing company, and asked D to go around
to P’s home, collect P’s car, and tow it to a stated address,
which D’s employee did.
•
D’s employee then met the thief at the stated address and, upon
payment of the towing fee, gave him possession of P’s car;
neither the thief nor P’s car was ever seen again.
•
Held: The unlawful removal of P’s car constituted a trespass
(at least), as it involved an intentional act of direct unlawful
interference with P’s actual possession of the goods (no
intention to deprive P of his possession was required); but when
D gave possession to the thief, and made it impossible to
return the car to its owner, this was a conversion as well (an
intentional exercise of dominion over the car inconsistent with
P’s rights).
ii. Against THIRD PARTIES:
• Since the bailee has possession, he or she may
potentially sue in:
–
–
–
–
conversion;
detinue;
trespass; and/or
negligence,
based, essentially, on his or her POSSESSORY
TITLE: as between bailee and stranger,
possession is title.
The BAILEE’S Rights:
•
Consider the bailee’s property rights against:
i.
•
The wrongdoer cannot plead “jus tertii” — i.e.,
that someone other than the plaintiff is the true
owner or superior title-holder.
•
What damages can the plaintiff (bailee) claim
against the wrongdoer?
the BAILOR; and
the owner (i.e., lost hire revenue). Detinue was abolished in England by the Torts
(Interference with Goods) Act 1977, s 2(1).
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Þ
deprived of the use of his samples during the
season.
Early cases allowed the defendant to plead
jus tertii — at least for the purpose of
limiting damages.
Þ
- Claridge v South Staffordshire Tramway
Co [1892] 1 QB 422
- The Winkfield [1902] P 4270
•
A horse was bailed to the bailee (P), an auctioneer.
•
The horse was injured through D’s negligence (it
was scared by D’s tram, which was travelling too
fast).
•
But these cases were OVERRULED in:
Held: P could not recover for injury of the horse,
because P, the bailee, was not liable to the bailor for
the loss — i.e., P was not negligent, D was; as the
horse was the owner’s property, P did not sustain
any loss.
•
Two ships collided in fog off the coast of South
Africa; one sank and the mail it was carrying was
lost.
•
The other vessel was negligent and the PostmasterGeneral sued as bailee of the mail for the value of
the mail.
•
Held: D (the owners of the negligent ship) were
liable for the full value of the mail; it was irrelevant
to D’s liability that P could not be sued by the
bailors, the owners of the mail (because P was not
negligent — the other ship was); possession
constituted title against the wrongdoer, who cannot
set up the jus tertii.
“The right to bring an action against the wrongdoer is
one thing; the measure of the damages recoverable in
such action is another. …. I cannot understand why a
bailee should be allowed to recover damages beyond
the extent of his own loss simply because he
happened to be in possession.”
Hawkins J
“[T]he wrongdoer … is quite unconcerned with what
the rights are between the bailor and bailee, and
must treat the possessor as the owner of the goods
for all purposes quite irrespective of the rights and
obligations as between him and the bailor.”
“A physical interference with possession is a wrong for
which undoubtedly a bailee may sue; but it is quite
another thing to say that he may recover in such
action the same damages as if he were the owner.”
Wills J
•
So:
• As between BAILEE and STRANGER:
Þ “[P]ossession gives title — that is, not a
limited interest, but absolute and complete
ownership, and he is entitled to receive back
a complete equivalent for the whole loss or
deterioration of the thing itself”.
- Brown v Hand-in-Hand Fire Insurance
Society [1895] 11 TLR 538
•
Goods (some stock samples) belonged to a Mr
Loser.
•
The goods were in P’s custody and damaged by D’s
(P’s landlord’s) negligence (influx of water from the
floor above).
•
The contract between P and the owner didn’t specify
conditions as to care of the stock; on general
principles, P was not liable to the owner (no
negligence by P).
•
Held: P could not recover damages for loss of the
goods: he was only able to recover £10 for his
personal trading losses as a result of being
• As between BAILEE and BAILOR:
Þ
Bailee may, irrespective of fault, have to
account to the bailor for damages received in
EXCESS of the bailee’s personal loss.
= the “value of the bailor’s reversion”.
70
The Winkfield has been applied many times in Australia, including in
Queensland. See The Premier Group Pty Ltd v Followmont Transport Pty Ltd
[1999] QCA 232 [7]; [2000] 2 Qd R 338, 344.
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in the identity of the legal person for whose
benefit the goods are held.
Bailee’s Defences Against Successors of the
Bailor
Þ
Once the bailee has attorned to someone other
than his or her original bailor, the attornment
operates as an estoppel (i.e., the bailee cannot
subsequently deny the attornee’s title to the
goods comprised in the attornment, and hence
his or her duty to take care of them).
Þ
The other consequence is that the purchaser of
goods, to whom their current bailee has
attorned, is subject to the SAME exclusions of
liability as are contained in the original
bailment between the seller and the attorning
bailee
• If the bailor sells his or her interest in the goods bailed
while they are still in the bailee’s possession, can the
bailee invoke defences in any contract of bailment
against the new bailor (a stranger to the original
contract)?
Sells the bailed goods
Bailor/Owner
New Owner/Attornee
Contract of
bailment
(exclusion clauses)
Attorns
Illustration from the case law:
Bailee/Attornor
Goods in bailee’s possession
- HMF Humphrey Ltd v Baxter, Hoare & Co Ltd
(1933) 149 LT 603
• Consider “attornment”:
Þ
Þ
Þ
Attornment is a method by which the relationship
of bailor and bailee can arise without any form
of physical transfer or delivery of the goods = a
form of constructive delivery (i.e., an alteration
in control over goods without any change in
their physical possession).
It consists of any overt or positive
acknowledgement (by words or conduct, or
both) by a possessor that he or she now holds
the goods as bailee for someone other than the
party who originally bailed them to him or her.
It signifies a change in the character of the
bailee’s possession, as well as marking a change
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•
Arcos Ltd owned hazel nuts that were kept in D’s
warehouse.
•
Arcos sold the goods to P.
•
Due to damp conditions, the nuts became mildewed and
were unsaleable.
•
The warehousing contract between Arcos and D
excluded D, the bailee, from liability.
•
So, the question was whether D (bailee) could maintain
that defence against P, the new bailor (transferees of
the original bailor).
•
Held: D was entitled to the defence; P took subject to
the warehousing contract; business expedience
demanded such a result: in effect, if the bailee is
expected to attorn to the new bailor (i.e., acknowledge
that he or she holds the goods under the contract of
bailment for P, the new bailor), then P should be bound
by the terms of the warehousing contract (and cannot
selectively ignore some of its terms).
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a.
Obligations of the Bailee
The Bailee’s EXPERTISE:
•
•
As mentioned earlier (and subject to contract (later)71),
there are three primary bailee obligations arising from
the bailor–bailee relationship:
1.
2.
3.
- E.g., Wilson v Brett (1843) 11 M & W
113; 152 ER 737
To exercise a standard of care in respect of
the bailed goods (safeguard them from loss,
damage or destruction);72
To use the bailed goods only within the terms
of the bailment, and not to convert, make
unauthorized use of, or misuse them; and
At the end of the bailment, to redeliver the
bailed goods in specie or deal with them
according to the bailor’s instructions (note:
NOT an absolute duty73).
• Two particular circumstances may influence the bailee’s
liability to the bailor:
a. Special skill and judgement possessed by the
bailee; and
72
73
•
An experienced horseman took possession of a
horse for the purpose of showing it to a prospective
buyer.
•
While being ridden on unsuitable ground, the horse
fell and broke one of its knees.
•
Held: Bailee was liable; “In the case of a gratuitous
bailee, where his profession or situation is such as
to imply the possession of competent skill, he is
equally liable for the neglect to use it”; the horse
was very valuable, too, which only increased the
standard of care expected of the bailee.
• Similar principles apply regarding the bailee’s
facilities:
- E.g., Brabant & Co v King [1895] AC 632
•
b. The bailee DEVIATING from the terms of the
contract of bailment.
71
If the bailee holds him- or herself out as
possessing special skill or knowledge, this may
affect the bailor’s expectations and be reflected
in a higher standard of care.
It is trite law that, subject to statute, the duties of a bailee can be modified by
contract: Morphett v Rivergate Marina & Shipyard Pty Ltd [2018] QCA 15, [21]–
[24].
We will not consider special types of bailee, such as common carriers and
common innkeepers, who have an onerous duty imposed upon them as bailees,
in contrast to a mere duty to take reasonable care. Their liability is strict: they
are, generally speaking, liable to compensate the bailor for any damage to or
loss of the bailed goods, irrespective of whether the damage or loss was due to
their negligence. Subject to certain limited statutory exceptions, such bailees
may be regarded as “insurers” of the goods.
That is to say, if the goods cannot be redelivered in specie because they have
been lost or damaged while in the bailee’s custody without fault on the part of
the bailee, the bailee generally does not breach this third obligation.
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Legislation required the storage of explosives in a
magazine operated by the Queensland
government, located near the Brisbane River.
•
The store was flooded.
•
The government was a bailee for reward (a storage
rent was payable).
•
Held: The government was negligent; the goods
were of a specialized nature (explosives) and the
bailee was under a duty to be expected from a
skilled storekeeper acquainted with the risks to be
apprehended either from the character of the
storehouse itself or its locality; “From the very
nature of the transaction the depositor is entitled to
rely upon the care and skill of his bailee.”
•
Note: the bailee had argued that because the
bailor had observed the conditions of the storage
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facilities and its defects, the bailor was volenti;
however, this did not succeed: volenti
presupposes the bailor having choice in the
matter, and here the bailor was required by law to
store the explosives with the defendant bailee.
b.
- Compare Harper v Jones (1879) 4 VLR
536
Þ bailee’s duty may be negatived if
the bailor overrides the bailee’s
judgement
The Effect of the Bailee DEVIATING from the
Conditions of the Contract of Bailment:
• “Deviation” exposes the goods to different
RISKS than originally accepted by the bailor …
Þ
bailee’s liability is STRICT.
- E.g., Lilley v Doubleday (1881) 7 QBD
510
•
Rice was stored by P in D’s warehouse.
•
•
Bailor (P) was concerned about contamination from
other sacks stored there and (contrary to the
bailee’s advice) instructed the bailee (D) not to
store his (P’s) sacks on the platform and instead to
place them on the ground.
The bailee contractually undertook to store goods
at a particular place and instead stored part of the
goods at another facility.
•
The goods were destroyed by fire in the second
facility without negligence by the bailee (and so in
normal circumstances the bailee would not be
liable).
•
Held: The bailee was liable for the value of the
goods despite the absence of negligence; he broke
his contract by dealing with the subject matter in a
manner different from how he contracted to deal
with them; his liability was therefore strict (i.e., he
was liable regardless of fault):
•
A flood occurred unexpectedly.
•
Held: D was not liable, as P had interfered and
taken the matter outside the control of D; this
reduced (but did not eliminate) D’s duty of care
accordingly.
- Skyway Service Station Ltd v McDonald
(earlier)
•
Bailor’s car was stored with bailee at Auckland
International Airport; it was damaged and certain
items were taken; bailee was held liable.
•
The bailee had tried to argue that if the bailor has
observed the conditions of storage, he has
consented to the risk.
•
Although Sinclair J did not accept this argument on
the facts, he did observe that if there are
continuing arrangements between a particular
bailor and bailee, and the conditions of storage are
obvious to both, this may amount to an
assumption of risk by the bailor, which may
correspondingly reduce or extinguish the bailee’s
duty/liability.
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“If a bailee elects to deal with the property
entrusted to him in a way not authorised by the
bailor, he takes upon himself the risks of so doing,
except where the risk is independent of his acts
and inherent in the property itself.”
Grove J
• A limit is where the loss would have happened
REGARDLESS of the deviation.
* * * * * *
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Some Cases on the BAILEE’S LIABILITY:
•
China Pacific SA v Food Corporation of India (the
“Winson”) [1982] AC 939 (HL)
•
An action was brought by salvors against a cargo owner for
reimbursement of storage expenses incurred by the salvors for the
period 10 February → 24 April 1975 ($110,982).
•
Facts: A ship carrying D’s cargo of wheat became stranded on a
reef in the South China Sea; war breaks out around them between
North and South Vietnam.
•
Question: If we were to ask at this point what the obligations of the
ship owner were as bailee, what would be a reasonable thing to
do?
•
•
What was the point of that argument? If the salvors were a subbailee, it was not in direct contractual relations with the cargo
owner (D) (the principal bailor) and so the sub-bailor (the ship
owner) was liable to pay the salvors for storage costs:
•
The cargo owner’s position:
(STRANDING) (WAREHOUSING BEGINS)
21 JANUARY
10 FEBRUARY
CARGO
OWNER
CONTRACT
SHIP OWNER
BAILMENT
- 21 January 1975: vessel stranded on a reef.
- 22 January 1975: the ship owner’s managing agents in Hong
Kong entered into a salvage agreement.
Next event: Salvors remove 15,500 tons of wheat and move it to a
safe port (Manila Harbour).
•
To prevent its deterioration, the salvors arranged for the wheat to be
stored in:
SUB-BAILMENT???
•
Only when the ship owner’s contract with D (cargo owner) ended,
on 24 April, did the ship owner drop out of the picture and the
salvors became D’s bailee. But prior to that, D argued that the ship
owner was responsible for the salvors’ costs (i.e., 22 January to 24
April).
•
Held (on this point): The salvors were bailee of the cargo owner
(D). Liability for the salvors payment could be required from the
cargo owner alone, who was the only party liable to provide
security, because the goods salvaged may be subject to a charge
(salvors’ lien) (and they of course belonged to the cargo owner —
the only party able to give a charge).
•
So: When the salvors took possession from the ship owner (from
10 February), it was a straight bailment from the cargo owner
and not a sub-bailment (ship owner parted with possession in
January and bailor was the cargo owner); the ship owner then
dropped out of the picture (the ship owner couldn’t, say, make a
demand for return of the goods from the salvors); when the wheat
arrived in Manila Harbour, the salvors would be liable to deliver
possession to the cargo owners, not the ship owner; the only subbailments, therefore, were from the salvors to the on-land
depositaries.
•
Another point: Notice that the salvors’ status as bailee changed
as each parcel of wheat was unloaded in Manila Harbour. How?
The salvors were bailee for reward in respect of its salvage
services, but once goods were delivered to a safe port, these
services came to an end. But as salvors it still had possession
qua sub-bailor vis-à-vis the depositaries, although it had become a
gratuitous bailee vis-à-vis the cargo owner. Even as a gratuitous
bailee it had a duty to protect the goods, expressed as:
- a bonded warehouse; and
- a hold of a vessel in port.
•
This took place between 10 February and 30 April 1975.
•
On 24 April, the ship owner advised D (cargo owner) that it was
abandoning the voyage (thus formally ending their contract).
•
On 5 August, D (cargo owner) took delivery of the wheat.
•
In terms of the salvors’ obligations as bailee, it too, like the ship
owner, had taken reasonable steps to safeguard D’s goods and so
could not be challenged on that basis.
•
D’s position: D accepted responsibility for storage charges from
24 April (when its contract with the ship owner ended) to 5 August
(when D took possession of the wheat), but refused to reimburse
the salvors for the period 10 February → 24 April.
•
(OWNER
COLLECTS GOODS)
5 AUGUST
SALVORS
Answer: Promptly enter into a salvage agreement, which it did
(signed on behalf of both the ship owner and the cargo owner). So:
•
(CONTRACT ENDS)
24 APRIL
D argued that while the contract with the ship owner remained in
force (i.e., until 24 April), the ship owner was still the bailee, the
ship owner had actual (or an immediate right to) possession,
which it transferred to the salvors under a contract that created a
sub-bailment between the ship owner and the salvors.
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“… a duty of care to the cargo owner to take such measures to
preserve the salved wheat from deterioration by exposure to the
elements as a man of ordinary prudence would take for the
preservation of his own property.”
•
•
•
Clearly, the salvors had met that standard.
•
An important corollary: As the salvors were under a duty to
preserve the goods for which it could be liable in damages (if it
didn’t discharge the duty), it had a corresponding right to be
reimbursed by the cargo owner (head-bailor) for the reasonable
expenses of carrying out that duty. (Here, the salvors did so by
sub-bailment — i.e., delivering possession to the warehouse and
vessel in Manila Harbour.)
•
93 cases of pharmaceutical products were delivered to D for
warehousing; soon thereafter, 64 cases weighing over five tons
were stolen from the warehouse — virtually a res ipsa loquitur
situation.
•
The onus shifted to D (bailee), but it took no steps to prove that it
had taken reasonable care; it didn’t even call evidence from its
own warehouse employees.
•
D didn’t have a system for counting incoming boxes; control and
security measures left much to be desired.
•
D was, accordingly, liable. An easy case.
Note that the yard was frequently burglarized, which would tend
to increase the standard of care that D owed.
•
The most damning piece of evidence, perhaps, was the tow truck
driver saying that he wasn’t surprised to discover the burglary the
next morning — he told the court that he wouldn’t want his own
car to have been left there!
•
Also: the execution of the burglary would have taken some time
and yet it went undiscovered; thieves might otherwise have been
scared off by an alarm or night watchman.
•
Held: Bailee was liable.
Jackson v Cochrane [1989] 2 Qd R 23
Port Swettenham Authority v TW Wu & Co [1979] AC
580
•
•
•
P delivered a caravan to D, a dealer, on consignment. D was not
a gratuitous bailee: he stood to gain a commission; therefore, he
had to observe the standard of care of a bailee for reward.
•
D was shoddy with paperwork and procedures.
•
A stranger showed up one day, with others in tow, claiming to be
a friend of the owner; after one failed attempt to contact the
owner, D let the stranger have the caravan; it was never seen
again.
•
Not only was this negligence, it was also a conversion: a
misdelivery of the goods to a third party without the true
owner’s authority. Lack of negligence is no defence to
conversion, as liability is basically strict. D had to show that he
had authority to deliver the goods to the stranger and he couldn’t;
therefore, he was liable for value of the caravan.
•
Note that failure to redeliver goods to bailor generally does not
produce liability if the failure to do so is without fault on the part
of the bailee. An obvious exception to this is where the failure
occurred because of the bailee’s own misdelivery/conversion,
even without fault. There is a difference between a third party
taking the goods out of the bailee’s hands without the bailee’s
negligence and the bailee giving possession to a third party
without negligence — the lack of fault averts liability in the first
situation but not in the second.
Brennan v SIMU Motor Services Ltd [1988] DCR 34
•
P’s car was towed to D’s yard after an accident; its wheels, tyres,
stereo, and other internal contents were stolen overnight.
•
The facts were finely balanced. In favour of the bailee (D):
- Yard was totally enclosed by a fence with barbed-wire
topping;
- Bright lights;
- Visited at night by a security guard on patrol.
•
•
But (adverse factors):
Pitt Son and Badgery Ltd v Proulefco (1984) 153
CLR 644
- No night watchman in situ (valuable items were being stored;
might have warranted a night watchman);
- No security alarm.
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•
D stored graziers’ wool before it was sold to third-party
purchasers. The wool was often highly valuable.
•
The wool was stored in a woolstore in Newcastle, NSW. The
facility was fairly run down. There were a number of buildings
(stores) in a compound, one of which was occupied by D. It was
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constructed out of old, dry timber; easily combustible; no
sprinkler system was installed; there was no perimeter fencing.
D just relied on a paling fence around the various woolstores.
Palings were missing (locals took for firewood over the winter).
•
•
•
Other companies in the compound did a much better job than
D: made their buildings secure; put in sprinklers, alarm systems,
and so on.
•
But D had done a ramshackle job: its building was not lit at
night; there was no security; there was a hole in the wall that
hadn’t been repaired.
•
A drifter came in one night and stuffed newspaper into the hole,
lit it, and it all went up, including P’s wool.
•
Held: This was a clear-cut case of negligence. Notice how the
High Court just spoke in normal “negligence” terms — no
“special rules” seemed to apply for bailment.
•
An aggrieved former employee drove up very early one morning
with a truck and accomplices; he helped himself to P’s goods; he
was there for nearly an hour.
•
A single employee was working in another part of the facility; he
saw what was happening but couldn’t speak English and had no
access to a phone to call for help.
•
There were no locks on the freezer doors.
•
Held: No reasonable care had been taken to safeguard P’s
goods; the Court listed the individual breaches:
- CCTV not monitored;
- Locks and alarm system were deactivated when the
employee arrived (while the employee was off in a remote
part of the factory);
- D should have had a gatekeeper if the gates were unlocked
and the alarm was deactivated;
- The employee had no access to a phone to call for help;
- The employee couldn’t speak English and so couldn’t call
for help even if a phone were available; nor could he
challenge the intruder;
- The value of the stored items was high relative to the cost
of providing the necessary precautions;
- The alarm system should have been zoned;
- The movement sensors had been broken for two years.
Terry Hogan Prestige Cars v Opera Investments Pty
Ltd [2006] NSWCA 139
•
P placed an expensive Mercedes on consignment with D, a
prestige car dealer in Sydney.
•
It was a place of quite high security: alarms, CCTV, PIN-coded
locked doors; but there were no bollards outside, and the keys
were not locked up in the showroom.
•
Thieves in balaclavas showed up with jackhammers in the wee
hours one morning and demolished the retaining wall; they got
the keys from an unlocked cabinet, drove through the glass and
out onto the street; a police chase ensued and the car ended up
badly damaged in the Cook River.
•
Held: D was not liable; there was no need to lock up the keys in
a safe in view of the other precautions and the smallness of the
risk of theft occurring.
•
The laxity of these arrangements emboldened a disgruntled
former employee with specific knowledge of the arrangements
and shortcomings to commit theft; this was not a random or
opportunistic instance of theft.
Obligations of the Bailor
• Safety of the goods:
I & J Frozen Foods (Aust) Pty Ltd v Ali Baba
Lebanese Cuisine Pty Ltd [2009] NSWDC 185
– Bailor may be liable for delivering unsafe goods to
the bailee: duty to warn so as to avoid harm to the
bailee.74
•
D stored P’s frozen goods (worth $111,000) in its Sydney
warehouse.
•
D had no rigorous security arrangements: CCTV was
installed but the movement sensors were deactivated (broken at
least two years); there was a back-to-base alarm system but it
was deactivated for all the premises by the first employee to
arrive in the morning; the gates were unlocked then, too.
74
E.g., Coughlin v Gillson [1899] 1 QB 145, 149; Pivovaroff v Chernabaeff (1978)
21 SASR 1. It is also possible, in relation to consumer goods subject to
ministerial safety standards, that Part 3-3, Division 1, of the Australian Consumer
Law will apply. A bailor who, say, leased goods not complying with an applicable
safety standard may render him- or herself vulnerable to pecuniary penalty under
s 106 of the Law.
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• Authority to create a bailment:
• Reimbursement of the bailee’s costs and expenses:
– Bailor must have sufficient authority by virtue of his
or her own possession of the goods to give
possession to the bailee.
– This is usually an express term in contractual
bailments, but it may be implied regardless of the
bailment type.78
• Condition, fitness and quality of the goods:
Termination of the Bailment
– Relevant mainly where the bailee is a hirer or
interested in the goods as future owner (e.g., under
hire-purchase agreement or rental).75
a. How do bailments end?
• If it is a bailment for a term, it ends at the expiry of the
agreed term (or earlier if by agreement or mutual
release by the parties).
– Where the bailee is a “consumer”, the statutory
guarantees under Part 3-2, Div 1, of the Australian
Consumer Law may also apply.76
• If it is a bailment at will, it ends at the bailor’s pleasure
(i.e., unilaterally on demand).
• Repossession of the goods:
– Bailor cannot interfere with the bailee’s possession
in breach of the bailment (e.g., cannot repossess the
goods until the bailment expires if it is a bailment for
a term).
• Generally, though, the bailment will end when the
bailee is no longer in possession of the goods either
because (1) the bailor had re-taken possession, or
(2) the bailee has delivered the goods to a third
party at the bailor’s direction and retains no
reversionary right to possession.
– Where the bailee is a “consumer”, the statutory
guarantees under s 52 of the Australian Consumer
Law (guarantee as to undisturbed possession) may
also apply.77
• By repudiation:79
–
75
76
77
E.g., Derbyshire Building Co Pty Ltd v Becker (1962) 107 CLR 633; Cottee v
Franklin Self-Serve Pty Ltd [1997] 1 Qd R 469 (plaintiff injured by defective
shopping trolley).
But see s 63(a) of the Australian Consumer Law: “This Subdivision does not
apply to services that are, or are to be, supplied under: (a) a contract for or in
relation to the transportation or storage of goods for the purposes of a business,
trade, profession or occupation carried on or engaged in by the person for whom
the goods are transported or stored; …”.
Ditto.
78
79
“[T]he act that is necessary to terminate the bailment must
be a very serious act and one which is virtually a
disclaimer of the contract of bailment. … [A] deviation
short of repugnancy or disclaimer of the bailment [does
For example, in The Winson (above), the bailee (salvor) was under a duty to
preserve the goods in its care; accordingly, it has a corresponding right to
reimbursement for the costs of doing this.
Strictly speaking, the bailment does not end automatically by repudiation or
disclaimer (although it is sometimes expressed that way, including in leading
cases); the bailor merely acquires the right to retake possession of the goods
immediately (provided that can be achieved without breach of the peace: Toyota
Finance Australia Ltd v Dennis (2002) 58 NSWLR 101).
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not amount] … to the bailee losing all … right to
possession.”80
• Upon termination of the bailment, the right to
possession is then restored in the bailor.
• A bailment will also be terminated by and upon
destruction of the goods.81
•
The plaintiffs moved on (were evicted), leaving behind some
furniture and other personal effects (some £2500 worth).
•
The defendant and plaintiffs agreed that the defendant would
store the goods until the plaintiffs arranged to collect them.
•
The defendant stored the goods in a lock-up garage on the
estate.
•
Obviously, the defendant Council was a gratuitous bailee;
O’Connor J held that they thus owed a duty “to take reasonable
care of the goods bailed and to deliver them up when an
unequivocal demand is made”; the defendant had adequately
discharged that duty of care. (The plaintiffs argued that the
defendants should have mounted a guard at the garage, but
the Court considered that was going too far!)
•
Subsequently (some three days after the goods were initially
stored), Council officials arranged to meet the plaintiffs at the
rent office to take them to where the goods were stored.
•
However, through the defendant’s error, its officials failed to
keep the appointment and it was almost a month later when
they actually met and went to the garage.
•
It was then discovered that most of the plaintiff’s goods had
been stolen and the plaintiffs sued for their loss.
•
Held: In failing to keep the first appointment, the defendant had
negligently failed to comply with a reasonable demand for
redelivery of the goods; from that point on, the defendant
held the goods at its peril and became an insurer for the
period between the first and second appointments.
•
Of course, the defendant could escape liability by showing that
the loss occurred outside that period (i.e., either before the
first meeting or after the arrangement had been made for the
second one), but it couldn’t do that and so was strictly liable
for the loss.
b. The bailee’s duty to REDELIVER the goods bailed:
• When the bailment ends, the bailor is entitled to
demand that the bailee deliver up possession of the
goods.
• Failure to comply may give rise to liability:
–
–
–
–
breach of contract;
detinue;
conversion; or
deviation (strict liability).
• If the bailee is late or delays in returning the goods,
she or he becomes an insurer of the goods and is
strictly liable for any loss or damage that occurs
during the period of lateness or delay.
Illustration from the case law:
- Mitchell v Ealing London BC [1979] 1 QB 1
•
80
81
The plaintiffs were squatters in premises on a housing estate;
the defendant was the local authority who owned the estate.
The Anderson Group Pty Ltd v Tynan Motors Pty Ltd (2006) 65 NSWLR 400
[72], [80] (Young CJ in Eq). An example of an act of repugnancy would be where
the bailee makes unauthorized use of the goods or tries to sell them. Recall
Penfolds Wines v Elliott (earlier) and Union Transport Finance v British Car
Auctions (earlier).
E.g., Chapman Bros v Verco Bros & Co Ltd (1933) 49 CLR 306 (earlier).
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c. Can the bailee82 sell uncollected goods?
• It seems not, unless there is an agreement or
statutory provision authorizing sale, or the facts
otherwise justify an inference that the uncollected
goods have been abandoned by the bailor in all the
circumstances.83
• The common-law position is exemplified in:
•
Held: The bailee was liable in conversion despite having
made reasonable attempts to contact the bailor before the
goods were sold. (They were not “agents of necessity”.)
•
Note: When the goods were sold, they realized £13, but at the
date of trial, they were worth £115. However, Lord Goddard
CJ opined that the bailee should only be awarded the lower
amount because, in view of the bailee’s reasonable attempts to
contact the bailor, the bailor ought to have known of the
bailee’s intention to sell and collected his goods — his failure to
do so was a failure to mitigate his loss. So, while the bailor’s
failure to collect his goods had no impact on the bailee’s
liability, it may well have affected the measure of damages
he recovered (but sent back to trial on this).
- Sachs v Miklos [1948] 2 KB 23
82
83
•
A friend overstayed his welcome — or at least his goods did!
(Although he relied heavily on friendship, it did not stop him
from getting a carefully worded receipt for the furniture bailed.)
•
When the bailee sold the furniture four years later, the bailor
sued in conversion.
The law appears more relaxed in relation to involuntary bailees, who must only
do what is “right and reasonable” in the circumstances. This might extend
ultimately to authorizing disposal of the goods, for example to ensure that a
mortgagor complies with her obligation to give vacant possession of the secured
property to the mortgagee who is lawfully in possession. See, e.g., Campbell v
Redstone Mortgages Ltd [2014] EWHC 3081; [2015] 1 P & CR DG 18 [65]: “In
the circumstances, given the numerous opportunities [the mortgagor] was given
to collect and the numerous occasions on which she simply failed to act, I have
concluded that Redstone [the mortgagee] was entirely justified in instructing its
agents to remove those chattels from the Property and dispose of them.”
Involuntary bailees must at least not destroy the goods (unless the goods are of
a noxious nature and must be destroyed).
In Re Arcabi Pty Ltd (Receivers & Managers Appointed) (in liq) [2014] WASC
310, Sanderson M (at [109]–[113]) held that certain unclaimed goods (rare coins
and/or bank notes) held by a company over which receivers and liquidators had
been appointed had been abandoned by their owners (who were bailee
customers of the company) after the receivers had made numerous attempts to
contact the owners without success. The Master noted that the receivers had
gone to “great lengths” to contact the customers recorded in the company’s
books and records; they had published advertisements in The West Australian
and The Australian newspapers; and they had contacted the Commissioner of
Police to enquire whether the unclaimed goods had been reported lost or stolen.
Since the receivers were entitled in all the circumstances to regard the goods as
abandoned, Sanderson M held that they were free to sell them at auction.
• A statutory power of sale may exist (after six months)
by virtue of the Disposal of Uncollected Goods Act
1967 (Qld), in relation to “goods accepted by a bailee,
in the course of a business, for inspection, custody,
storage, repair or other treatment”.84
* * * * * * *
The Liability of Bailees for Acts
of Their Employees
• A bailee (particularly a bailee for reward) may
discharge its duties (e.g., repair of goods, storage,
transportation, etc.) through its employees or the
employees of a sub-bailee to whom it has given
possession of the goods.
Þ
What is the bailee’s or sub-bailee’s liability if
the goods are lost or damaged through the fault
of their employees?
• There are two alternative approaches here:
84
Where goods are sold under the Act, s 4A also declares the unpaid bailee’s
charges to be statutory interests to which s 73(2) of the PPSA applies, and
affords them priority over all security interests in relation to the goods.
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- Morris v CW Martin & Sons Ltd [1966] 1 QB 716 (CA)
i.
VICARIOUS LIABILITY; and
ii.
EXPRESS or IMPLIED TERM of the BAILMENT
(= direct liability).
• The old (19th-Century) view was that an employer may be
liable for the negligence of an employee but not for
dishonesty of an employee, because dishonesty (criminal
conduct, etc.) falls OUTSIDE OF his or her contract of
employment and is not an “authorized act”.
“No servant who turns thief and steals is acting in the course of his
employment. He is acting outside it altogether.”
Lord Denning MR (Morris v Martin)
• The exception was where the principal/employer profited
from the dishonesty/fraud.
P
(Morris)
BAILOR
•
All three members of (a strong) Court of Appeal held that D was liable
to P (although their approaches differed).
•
Diplock and Salmon LJJ viewed the situation in terms of vicarious
liability.
•
All three judges accepted that Lloyd v Grace, Smith & Co applies to
dishonesty and fraud of an employee, but subject to one important
limitation:
Þ The employer is only vicariously liable for the fraudulent conduct
of an employee whose duty it is to take care of the goods in
question.
• This view was finally overruled by the House of Lords in
Lloyd v Grace, Smith & Co [1912] AC 716, which held that
a master was liable for the dishonestly or fraud of his
servant if it was done within the course of the servant’s
employment, regardless of whether it was done for the
benefit of the master or of the servant.
A solicitor’s managing clerk, Sandles, deceived a client who came to
the firm for legal advice and services, and fraudulently transferred a
mortgage and real property to himself.
•
Lord Macnaghten referred to the fraud as being “committed in the
course of Sandles’ employment” — i.e., it was not rationalized as
falling outside the scope of his employment; it was simply an
unauthorized way of performing an authorized act.
D (Martin & Co)
SUB-BAILEE
Employee (thief)
• The irony here was that the worse the employee’s
conduct, the less likely it was that the employer would be
accountable for it.
•
Beder
(furrier)
BAILEE
(SUB-BAILOR)
“[The finding of liability here] … depends upon Morrissey [the thief] being
the servant through whom the defendants chose to discharge their duty to
take reasonable care of the plaintiff’s fur. … A theft by any servant who is
not employed to do anything in relation to the goods bailed is entirely
outside the scope of his employment and cannot make the master liable.”
Salmon LJ
“I base my decision in this case on the ground that the fur was stolen by
the very servant whom the defendants as bailees for reward had employed
to take care of it and clean it.”
Diplock LJ
•
A situation that falls outside of this principle is where an employee
merely has an opportunity, by reason of his or her employment, to
commit the theft/fraud:
“A theft by any servant who is not employed to do anything in relation to
the goods bailed is entirely outside the scope of his employment and
cannot make the master liable. So, in this case, if someone employed by
the defendants in another depot had broken in and stolen the fur, the
defendants would not have been liable. Similarly, in my view, if a clerk
• This was approved (for a bailment situation) in the
important case of:
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employed in the same depot had seized the opportunity of entering the
room where the fur was kept and had stolen it, the defendants would not
have been liable. The mere fact that the master, by employing a rogue,
gives him the opportunity to steal or defraud does not make the master
liable for his depredations … It might be otherwise if the master knew or
ought to have known that his servant was dishonest, because then the
master could be liable in negligence for employing him.”
Salmon LJ
•
Lord Denning MR likewise held that this was a precondition to the
employer’s liability, but he did not rationalize the liability in terms of
“vicarious” or “imputed” liability; rather, the bailee’s liability was a direct
and personal liability — one that couldn’t be escaped by delegating
his or her responsibilities to an employee.
•
He gives the example of a garage hand who goes on a “frolic of his
own” with a customer’s car and hits a motorcyclist; he suggests that the
employer is not liable to the motorcyclist but is liable to the owner of
the car.
Consider:
“The duty of the garage proprietor to the owner of the car is very different
from his duty to the motorcyclist. He owes to the owner of the car the duty
of a bailee for reward, whereas he owes no such duty to the motorcyclist
on the road. He does not even owe him a duty to use care not to injure
him.”
•
In other words, the employee’s duty to the motorcyclist stemmed from
his driving on the road; however, his duty to the car owner (bailor)
stemmed from his employer having custody of the car. Thus, the
former occurred outside the scope of employment, but the latter was
inside, precisely because custody of the car had been entrusted to the
employee by the employer.
“If the master is under a duty to use due care to keep goods safely and
protect them from theft and depredation, he cannot get rid of his
responsibility by delegating his duty to another. If he entrusts that duty to
his servant, he is answerable for the way in which the servant conducts
himself therein. No matter whether the servant be negligent, fraudulent, or
dishonest, the master is liable. But not when he is under no such duty. …
If the goods are lost or damaged, whilst they are in his possession, he
is liable unless he can show — and the burden is on him to show — that
the loss or damage occurred without any neglect or default or misconduct
of himself or of any of the servants to whom he delegated his duty.”
• Notice, though, that on either approach the bailee’s
liability to the bailor, for the misconduct of an employee of
the bailee, will depend critically on that employee being a
person whose duty it was to take care of the goods in
question (not a “mere opportunist”).
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- Moukataff v BOAC (above)
•
Recall the facts from earlier: Money was stolen from four
packages in BOAC’s possession.
•
Browne J applied Morris v Martin and held that the dishonest
employee who stole the packages containing money was one
of BOAC’s servants who was entrusted with the mailbags for
the purpose of loading and so was deputed to discharge some
part of BOAC’s duty in taking reasonable care of the plaintiff’s
property.
Compare:
- Swiss Bank Corporation v Brink’s-Mat Ltd [1986]
2 Lloyd’s Rep 79
• An employee of Brink’s security carriers conspired with others
to steal a valuable consignment by informing those others
about its whereabouts.
• Note: The employee did not steal the goods himself; it was
found that another employee (a Mr Freeman) had custody and
possession of the money at the relevant time.
• Bingham J said this of the guilty employee (Cardorka):
“… Cardorka was not at any time an employee to whom
Brink’s-Mat entrusted the care and custody of these notes,
or through whom Brink’s-Mat chose to discharge their duty
to take care of them. He did not convert the goods within
the course or scope of his employment. It is, I think, an
archetypal case of an employee whose employment gave
him the opportunity to commit a fraud.”
• So, Brink’s was not liable on that basis for the loss — a “mere
opportunity”, by virtue of the employment, does not suffice.
* * * * * * *
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Sub-Bailment
• Where a bailee entrusts custody of the goods to a third
party and retains a reversionary right to possession,
this creates a SUB-BAILMENT.
• An important factor is whether the arrangement is
personal to the bailee, for example because the
bailor is relying on a particular skill or expertise of
that bailee.
• Sub-bailee therefore receives the goods from the
HEAD-BAILEE/SUB-BAILOR rather than the
OWNER/HEAD-BAILOR.
Owner/Head-bailor
Head-bailee/Sub-bailor
• Implied authority to sub-bail depends on the terms
of the original bailment (the contract of bailment may
or may not include an express right to sub-bail), the
subject matter of it, and other material surrounding
circumstances.
Sub-bailee
• Ideally this should be “consensual” on both sides,
in the sense that the head-bailor has authorized the
sub-bailment and the sub-bailee has consented to
receiving the goods from the sub-bailor in the
capacity of a sub-bailee; however, a collateral
bailment (below) will still result when it is the subbailee only who is consenting to receiving goods
belonging to the head-bailor.85
• Status of HEAD-BAILEE/SUB-BAILOR:
• Depends on whether the bailee had AUTHORITY to
sub-bail, express or implied.
Illustrations from the case law:
- Martin v N Negin Ltd (1945) 172 LT 275
•
P took her coat to the dry-cleaners; the coat was lost while in
the hands of a sub-bailee.
•
Held: The bailee was liable in damages to the bailor.
•
Two factors took the bailee’s conduct outside the scope of the
bailment contract:
1. the coat was given to the bailee to be cleaned, but when
the spots refused to disappear, the bailee unilaterally
decided to have it dyed; and
2. the bailee had contracted to do the work personally,
and so sub-bailment was not authorized.
•
This was likened to a deviation situation, which negated the
sub-bailment.
•
[If we changed the facts slightly, e.g., P had instructed D to dye
the coat, then there might have been implied authority to subbail for that purpose, although still P had contracted with D
personally (the ticket P received apparently said: “Personal
service and individual attention.”)]
Þ Unauthorized sub-bailment constitutes a
deviation (and possibly a conversion).
- Garnham, Harris v Ellis [1967] 1 WLR 940
85
As the Privy Council explains in The Pioneer Container [1994] 2 AC 324, the
consent/authorization of the head-bailor is relevant to the question of whether
the head-bailor is bound to terms of the arrangement between the sub-bailor and
sub-bailee, but it does not prevent a collateral bailment arising as between the
sub-bailee and head-bailor, provided, of course, that the sub-bailee is sufficiently
aware of the head-bailor’s interest in the goods being taken into the sub-bailee’s
custody.
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•
A sub-bailing of the goods where that was not authorized was
held to be a conversion.
•
The bailment was created through a contract for the carriage of
copper wire (“the gold of thieves”).
•
The Court held that any authority to sub-bail (sub-contract)
must depend on the proper inference to be drawn from the
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contract, its subject matter, and other material surrounding
circumstances.
•
Normally, a contract of carriage may be sub-contracted; but
here, given the nature for the load — copper, which was highly
vulnerable to theft — a secure carrier was needed. There was
thus no authority to sub-contract to a general carrier. The
bailee should have known that the bailor would have flatly
refused if asked whether sub-bailment could be made to a
stranger.
- Edwards v Newland & Co [1950] 2 KB 534
•
Storage of furniture was deemed to be a service for which there
is no authority to sub-bail.
•
Denning LJ said that it all depends on all the circumstances of
the particular case. Personal skill and care of the contractor
(bailee) is the essence of a contract to store furniture. If the
contractor employs a sub-contractor for this purpose, they do
so at their own risk because, if the goods are lost while in the
hands of the sub-bailee, the contractor can’t say that they
would have been lost in any event. By breaking his contract,
the bailee has prevented any evidence as to what would have
happened if he had fulfilled it personally. Liability is strict (Lilley
v Doubleday cited).
• So, even if a bailee is authorized to sub-bail, she or he
must still exercise due care in selecting a
competent sub-bailee and may be liable in
negligence for a failure to do so.
• Relationship of the Sub-bailee to the HEAD-BAILOR:
• Can the owner of the goods (the head-bailor) sue the
sub-bailee directly, despite any lack of contractual
privity between them?
Þ
- E.g.: (1) they are in contractual privity but
there is an effective exemption clause in
place; or (2) there was simply no fault on
the part of the head-bailee (as in Morris v
Martin & Sons).
- James Buchanan & Co Ltd v Hay’s Transport
Services [1972] 2 Lloyd’s Rep 535
• P sued for the value of a large consignment of valuable whisky
that was lost after the carriers sub-bailed to a third party
(because the whisky, which had been loaded into a truck,
needed to be stored while the carrier’s truck was being
repaired).
This is practically important, as the owner
may be unable to sue the head-bailee (subbailor):
BAILOR
BAILEE
(sub-bailor)
• The third party’s facilities were poor: no alarms; inadequate
security arrangements; no guard dog; only one guard; truck not
covered; could be seen from the highway.
• Held: There was a sub-bailment to the third party; the third
party and the carrier were associated companies; the subbailment was gratuitous, but Hinchcliffe J held that the
standard of care was the same as for a bailment for reward,
namely, that which a reasonable person would take care of his
or her own goods in similar circumstances; the sub-bailee
couldn’t show that adequate care was taken; therefore, it was
liable to the owner.
• The head-bailee was also liable to the owner (as bailees for
reward): they were careless in making the sub-bailment in the
way they did (i.e., by not selecting a more secure sub-bailee).
SUB-BAILEE
•
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See Morris v Martin & Sons (above)
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•
The Pioneer Container [1994] 2 AC 32486
— the bailee will not be liable unless she or he
was negligent in choosing the sub-bailee).88
Þ Both owner and head-bailee have concurrently
the rights of bailor against the sub-bailee
according to the nature of the sub-bailment.
Þ Note: the sub-bailee may be able to rely on an
exemption clause in a contract between the
head-bailor and the head-bailee, that is, if that
exemption is an effective “Himalaya” clause (i.e.,
from your Law of Contract II course).89
Þ A precondition of the sub-bailee owing duties to
the owner is that the sub-bailee must be
sufficiently aware that an interest of a person
other than the bailee exits in the goods being
taken into custody (i.e., the sub-bailee must
know of the sub-bailment).
* * * * * * *
Þ The owner is bound by the conditions of the subbailment if she or he has expressly or impliedly
consented to the bailee making a sub-bailment
containing those conditions, but not otherwise.87
Exclusion or Limitation of Liability
• Subject to statute (e.g., the Australian Consumer Law,
Parts 2-3 and 3-2), bailees may limit or exclude liability
for breach of their bailment obligations if:
Þ This demonstrates (yet again) that bailment
does not depend on principles of contract.
Þ Unless excluded under the terms of the headbailment, the bailee will, in general, remain liable
for any default of the sub-bailee (although if the
head-bailor agreed to/contemplated the subbailment — so that the parties intended that the
“sub-bailee” would become, in effect, the bailee
86
87
The Pioneer Container principles have been endorsed and applied in
Queensland: see The Premier Group Pty Ltd v Followmont Transport Pty Ltd
[1999] QCA 232 [4]; [2000] 2 Qd R 338, 343.
Note that this may not be viewed as correct in Australia. In Philip Morris (Aust)
Ltd v Transport Commission [1975] Tas SR 128, Nettleford J (at 136–139)
considered himself unable to adopt Lord Denning’s dicta in Morris v Martin & Co,
based, among other reasons, on the High Court’s firm statement of the privity (of
contract) doctrine in Wilson v Darling Island Stevedoring and Lighterage Co Ltd
(1956) 95 CLR 43. In The Pioneer Container [1994] 2 AC 324, however, Lord
Goff of Chieveley (for the Privy Council), at p 338ff, accepted and explained Lord
Denning’s dicta, observing that “[s]uch a conclusion, finding its origin in the law
of bailment rather than the law of contract, does not depend for its efficacy either
on the doctrine of privity of contract or on the doctrine of consideration” (p 339D–
E).
i.
The limitation or exclusion is assented to by the
bailor, either by his or her signature on a contractual
document containing the exemption or in some other
way (e.g., bailor having adequate notice of the
exemption and acquiescing in it); and
ii.
The words of the exemption are sufficiently clear to
cover the particular default in question (e.g.,
negligence).
• Ambiguities are construed contra proferentem.
• Note also that although exemptions are most commonly
found in the parties’ agreement, they might also come via
statute (e.g., Brabant & Co v King (earlier)).
88
89
See, e.g., Westrac Equipment Pty Ltd v Owners of the Ship ‘Assets Venture’
(2002) 192 ALR 227 (FCA), 285–6.
Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon (Australia) Pty Ltd
(“The New York Star”) (1980) 144 CLR 300; 30 ALR 588 (PC).
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• The legislation only governs “sales” of goods — not gifts,
barters or exchanges, loans for consumption (mutuum), or
hires or leases of goods.
* * * * * * *
• Although the Act is said to be a “codification” of the law
in the area, s 61(2) nevertheless provides:
SALE OF GOODS ACT — THE
PASSING OF TITLE
“The rules of the common law, including the law merchant, save in so
far as they are inconsistent with the express provisions of this Act, and
in particular the rules relating to the law of principal and agent and the
effect of fraud, misrepresentation, duress or coercion, mistake, or other
invalidating cause, continue to apply to contracts for the sale of goods.”
Introductory
• Far and away the commonest way for ownership of
goods to pass from one legal entity to another is through
“sale”.
• All Australian jurisdictions have legislation governing the
sale of goods,90 although we shall for present purposes
focus on the Queensland Act: Sale of Goods Act 1896
(Qld).91
Þ
90
91
Unless otherwise stated, all references to sections in
these notes are references to that statute.
The legislation is modelled on the nineteenth-century codification of the
equivalent law in England: Sale of Goods Act 1893 (UK). The Australian state
and territory Sale of Goods Acts are more or less identical to the UK Act and with
one another, but minor (and important) local variations do exist.
For the other jurisdictions, see: Sale of Goods Act 1954 (ACT); Sale of Goods
Act 1923 (NSW); Sale of Goods Act 1972 (NT); Sale of Goods Act 1895 (SA);
Sale of Goods Act 1896 (Tas); Goods Act 1958 (Vic) (a re-enactment of the Sale
of Goods Act 1896 (Vic)); and Sale of Goods Act 1895 (WA). Note that the sale
of goods is also governed by overriding Commonwealth legislation, if relevant,
such as the Competition and Consumer Act 2010 (Cth), taxation law (including
sales tax), company law, as well as miscellaneous state and territory legislation
governing motor car traders, fair trading, etc.
• Many of the rules in the Act are “default” rules: they apply
only in the absence of a contrary intention disclosed by
the parties’ contract or course of dealing or usage.
Þ “Freedom of contract” thus generally prevails in the
sale-of-goods context (at least where the Australian
Consumer Law does not also apply).
• The Act governs a number of aspects of the sale of
goods:
1.
2.
3.
4.
5.
Þ
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The nature and formation of the contract of sale;
The terms of the contract (including implied terms);
The transfer of the property from seller to buyer;
The performance of the contract; and
Remedies for breach of contract.
Of primary relevance for present purposes are the
legislative provisions relating to 1. and 3. above.
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• Hire-Purchase Agreements:
Nature and Formation of the Contract of Sale
• Not a contract of sale, as there is no immediate or
conditional transfer of property; hirer merely has
an option (not an obligation) to buy the goods at the
end of the hire period (i.e., after the final rental
payment) — there is no “agreement to buy”.
What Is a Contract of Sale of Goods?
• See s 4 of the Act:
4
• Contrast an agreement to buy where the price is
payable by instalments; this is a contract for the sale
of goods.
Sale and agreement to sell
(1)
A contract of sale of goods is a contract whereby the seller transfers or
agrees to transfer the property in goods to the buyer for a money
consideration, called the price.
(1A) There may be a contract of sale between one part owner and another.
(2) A contract of sale may be absolute or conditional.
(3) When under a contract of sale the property in the goods is transferred
from the seller to the buyer the contract is called a sale; but when the
transfer of the property in the goods is to take place at a future time or
subject to some condition thereafter to be fulfilled the contract is called
an agreement to sell.
(4) An agreement to sell becomes a sale when the time has elapsed or the
conditions have been fulfilled subject to which the property in the goods
is to be transferred.
• Commercial Leasing Agreements:
• Not a contract of sale, as there is only a transfer of
possession (i.e., a bailment).
• Contracts for Work and Materials:
• Not a contract of sale, as what in substance is being
purchased is the skill/expertise and effort of another,
not the end product of that skill/expertise and effort
(i.e., the “goods” are simply the expression or result
of the purchased skill/expertise and effort).
• So, there must be:
–
–
–
–
a contract;
that transfers (or agrees to transfer) ownership;
of goods; and
a money consideration called the price.
• The contract is in essence one for the provision of
services (where goods may be incidentally
supplied).
• Contract of Sale Must Be Distinguished from Other
Transactions Not Falling within the Act
Examples:
•
• Barter or Exchange Contracts:
• Not a contract of sale, as there is no “money
consideration”.92
92
See THL Robina Pty Ltd v The Glades Golf Club Pty Ltd [2005] 2 Qd R 186, 194.
93
A commissions B, an artist, to paint X’s portrait for an agreed
fee. This is a contract for work and materials because the
main feature or substance of the arrangement is not delivery
of the canvas and paint, but rather engagement of the artist’s
services — B’s technical skill, experience and labour in
producing the portrait. It is only ancillary to the contract that
some materials (paint and canvas) will pass from B to A.93
Contrast selling an already completed portrait for a money
consideration, which is a contract for the sale of goods.
See Robinson v Graves [1935] 1 KB 579.
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•
A agrees to build a demountable home on its premises
according to B’s plans and specifications, and, on completion,
to transport it and place it on stumps on B’s land. The price is
payable progressively, with the final payment being payable
when the building is placed on B’s land and is ready for
occupation there. The contract is for work, labour and materials
(i.e., it is a building contract) and not one for the sale of
goods; moreover, the intention is that the final product is to be
used as a home, which is part and parcel of the land to which it
is annexed = “land”, not chattels/goods.94
Example:
•
• Needless to say, it can be extremely difficult at
times to discern the difference between contracts for
work and materials and contracts for the sale of
goods.
“The distinction between a contract for the sale of goods and a
contract for the provision of work and materials is frequently a fine
one and the tests for distinguishing the one from the other are
unsatisfactory and imprecise.”95
• Perhaps the best that can be said is that the
substance or essential character of the transaction
must be determined as a matter of fact in each
case.96
• Service Contracts (Where Goods May Be Incidentally Supplied):
• Contracts for the provision of services where goods
may be incidentally supplied are not contracts of
sale for reasons similar to those pertaining to the
previous example.
94
95
96
X develops serious post-operative bleeding while a patient in a
private hospital and is given a blood transfusion. Unfortunately,
the donor blood is infected by a virus that is transmitted to X
through the transfusion. X sues the hospital for breach of the
implied terms as to merchantable quality and fitness for
purpose applicable to certain contracts for the sale of goods (in
this case blood). But X’s action fails because there is no
relevant contract of sale: the essence of the contract, rather, is
one for the provision of services (hospital, medical and
nursing) to treat X and restore her to health. To the extent that
goods are provided to X (e.g., food, sleeping tablets, antibiotic,
dressings, etc), those are provided merely as an incident of (or
merely incidentally to) the contract for the provision of services.
(Compare E v Australian Red Cross Society (1991) 31 FCR
299, especially 304–306 (re Trade Practices Act 1974 (Cth), ss
71 and 74; Sale of Goods Act 1923 (NSW), s 19).)
• However, it might be possible in some circumstances
that a contract may be divisible into a contract for
services and a contract for the sale of goods.
• “Sale” vs. “Agreement to Sell”
• As s 3(1) of the Act (“Interpretation of terms”) confirms, a
“contract of sale includes an agreement to sell as well as
a sale”; and s 4 (above) clearly purports to deal with them
both.
• The principal differences between the two can be
summarized as follows:
See Hewett v Court (1983) 149 CLR 639 (HCA).
Ibid 646 (Gibbs CJ). See, generally, G W Bartholomew, “Contracts for the Sale
of Goods and Contracts for Work and Labour” (1961) 35 Australian Law Journal
65.
Not all courts are fond of the “substance of the contract” test. In Deta Nominees
Pty Ltd v Viscount Plastic Products Pty Ltd [1979] VR 167, for example, the
Court considered the test “illogical and unsatisfactory”. It preferred instead to ask
whether the contract, when carried out, would result in the sale of a chattel; if so,
the contract is one for the sale of goods (see ibid, 181–6).
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SALE
• What Constitutes “Goods”?
AGREEMENT TO SELL
• Section 3(1) of the Act (“Interpretation of terms”) defines
“goods” as including:
•
The contract may be
“executed” or
“executory”.97
•
The contract is necessarily
“executory” only.
•
Ownership of (i.e.,
“property in”) the goods is,
by the contract,
transferred to the buyer
immediately when the
contract is made,
irrespective of whether it is
a cash or credit
transaction.
•
Ownership (i.e., “property in”)
the goods is to be transferred
to the buyer at some future
time, or subject to the
fulfilment of some condition (s
4(3)), e.g., a conditional sale
where instalments remain
outstanding.98
•
Buyer acquires a right in
rem.
•
Buyer’s rights are in personam
only.
•
Seller can sue the buyer
for the price of the goods
(an action in debt) (s
50(1)).
•
Seller can sue buyer for
damages for refusal to accept
the goods (s 51(1)).
•
Buyer can sue seller for
damages if seller defaults
(s 52(1)), or for
conversion if seller
wrongfully disposes of the
goods to a third party.
•
Buyer can sue seller for
damages for wrongful nondelivery of the goods (s 52(1)).
•
(Subject to agreement) risk
passes to the buyer with
ownership (s 23(1)).
•
(Subject to agreement) risk
remains with seller until
ownership passes to buyer (s
23(1)).
“all chattels personal other than things in action and money, and also
includes emblements and things attached to or forming part of the land
which are agreed to be severed before sale or under the contract of sale”.
Þ In other words, “goods” generally only includes
tangible property other than land.
• So, included as “goods” would be such things as:
– Animals (including fish);
– Collectable coins and notes (i.e., not those in use as
currency);99
– Ships, aircraft, caravans and other vehicles;
– Gas and electricity;
– A computer system comprising both hardware and
software;100
– Minerals, timber and growing crops that are to be
severed from the land before ownership of them
passes to the buyer;101
– Fixtures (e.g., machinery, houses) that are to be
detached from the land before the sale or under the
contract of sale; and
– Any component part of, or accessory to, goods.
• But excluded from “goods” would be such things as:
99
97
98
It is often said in the sale-of-goods context that in “sale” situations, the contract is
“executed”, but this is, strictly speaking, not accurate. Title may pass
immediately when the contract is made while delivery and/or payment
obligations still lie for performance in the future. In that sense, contracts that
effectuate an immediate transfer of property — sales — might be executory as
well as executed.
Once the time elapses or the condition is fulfilled, the “agreement to sell”
becomes a “sale”: s 4(4).
100
101
Moss v Hancock [1899] 2 QB 111; Money World NZ 2000 Ltd v KVB Kunlun NZ
Ltd [2006] 1 NZLR 381.
Toby Constructions Products Pty Ltd v Computa Bar (Sales) Pty Ltd [1983] 2
NSWLR 48 [54]. Computer software by itself is not goods (e.g., if you download
it from the Internet), although if you buy it on a CD-ROM, there will be a sale of
goods. See Gammasonics Institute for Medical research Pty Ltd v Comrad
Medical Systems Pty Ltd (2010) 77 NSWLR 479; St Albans City and District
Council v ICL [1996] 4 All ER 481, 493.
E.g., Marshall v Green (1875) 1 CPD 35, 38; Ashgrove Pty Ltd v Deputy Federal
Commissioner of Taxation (1994) 53 FCR 452.
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– Money (currency);
– Choses in action (such as negotiable instruments,
shares in a company, debts, insurance policies,
intellectual property rights);
– A mere “right” to enter land and remove something
from it;102
– Blood by way of blood transfusion;103 and
– Real property (such as land and things that are “part
and parcel” of the land (e.g., houses)).
within the Act even though it contained provisions for the supply of
services, in addition to the actual sale of the house.
• “Money Consideration” or “Price”
• There will be no “sale of goods” in the absence of a
money consideration or price, which includes both the
actual payment of money (executed consideration) as
well as the promise to pay money (executory
consideration) — i.e., money must be involved.105
Illustration from the case law:
–
102
103
104
• However, the price need not be wholly satisfied by
money; it suffices that part of the transaction includes a
money consideration, even if another part involves an
exchange of goods or other property (e.g., you agree to
buy a car for a money price but part of the deal includes a
trade-in of your current vehicle106).
Symes v Laurie [1985] 2 Qd R 547
•
Laurie owned a house that was attached to the land of a third party in
Labrador.
•
Laurie entered into a “House Removal Contract” with Symes, under
which the former agreed to sell the house to the latter, to remove it,
intact, from Labrador to specified location at Mt Beppo, to re-stump it
at that location, arrange for council inspection and approval, and to
perform certain repairs and replace certain items.
•
The house was damaged in transit between sites and so the issue of
risk arose (i.e., risk would lie with the owner (unless otherwise
agreed)).
•
An initial question, though, was whether the Sale of Goods Act rules
as to passing or property and risk applied, and that turned on whether
the house fell within the definition of “goods” in the Act.
•
Held: There was no doubt that the house came within the definition of
“goods” in s 3 of the Queensland Act — the house was agreed to be
severed from the Labrador land for the purpose of the sale to Symes
under the contract, and it did not matter that one of the terms of the
contract was that the goods would then be affixed to land belonging to
Symes;104 hence, the contract was a contract for the sale of goods
See Morgan v Russell & Sons [1909] 1 KB 357 (no specific agreement that the
cinders and puddle slag would be “severed before sale or under the contract of
sale”; contract more analogous to a mining lease giving the right-holder the right
to access the occupier’s land to remove the materials). See also Mills v Stokman
(1967) 116 CLR 61.
E v Australian Red Cross Society (1991) 31 FCR 299.
Compare Hewett v Court (1983) 149 CLR 639, which is not cited anywhere in
the Full Court’s judgment.
• The price may be fixed by the contract, left to be fixed in
manner agreed under the contract (machinery or formula),
or determined by the course of dealing between the
parties (s 11(1)), otherwise a “reasonable price” must be
paid: s 11(2).
Formation of the Contract of Sale
• The principles and rules governing the formation of a
contract of sale basically reflect the criteria for the
formation of contracts generally.
105
106
Thus, in Esso Petroleum Ltd v Commissioners of Customs and Excise [1976] 1
All ER 117, “World Cup Coins” were given away with every four gallons of petrol
purchased; there was no “sale” of the coins because the consideration — buying
four gallons of petrol — was not a “money consideration”.
Commission Car Sales (Hastings) Ltd v Saul [1957] NZLR 144 (motor car
purchased for £1200, comprising £900 cash and a trade-in valued at £300;
transaction was a sale-of-goods contract); see also THL Robina Pty Ltd v The
Glades Golf Club Pty Ltd [2005] 2 Qd R 186, 194–5 (Chesterman J).
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• Section 5(1) of the Act provides that the “[c]apacity to buy
and sell is regulated by the general law concerning
capacity to contract, and to transfer and acquire property”.
• Except in Tasmania and Western Australia, no
formalities (such as writing) are required as a
precondition to enforceability of the contract of sale.
• The difference between “ascertained” and
“unascertained” goods is particularly critical, as a
contract to sell unascertained goods is not a sale, merely
an “agreement to sell”, and property in the goods (i.e.,
“ownership”) cannot pass until the goods have been
ascertained and the agreement has converted into a
sale — of which more later.
• So, an enforceable contract of sale may be made:
• So, goods are classified in the Act as follows:
•
•
•
•
in writing (either as a simple contract or under seal);
orally;
partly in writing and partly oral; or
by inference from the conduct of the parties.
Þ
Section 6 of the Act confirms this but does not
affect the law relating to corporations.
The Classification of Goods
(2)
(3)
Þ
Goods that are in existence and owned or
possessed by the seller at the time of the
contract of sale (e.g. a particular car).
Þ
They may be specific or unascertained (later
becoming “ascertained” before property can
pass).
• Future goods:
• Goods are classified in various ways within the Act; see
e.g.:
8
(1)
• Existing goods:
Existing or future goods
The goods which form the subject of a contract of sale may be either
existing goods, owned or possessed by the seller, or future goods.
There may be a contract for the sale of goods, the acquisition of
which by the seller depends upon a contingency which may or may
not happen.
When by a contract of sale the seller purports to effect a present
sale of future goods, the contract operates as an agreement to sell
the goods.
• As we shall see, the passing of property (and risk), as
well as the remedies available to buyer and seller,
depend on how the goods are classified.
Þ
Goods that are to be manufactured or
acquired by the seller after the making of the
contract of sale (s 3(1)).
• Specific goods:
Þ
Goods that are identified (not merely
identifiable) and agreed upon at the time the
contract of sale is made, i.e., as the very goods
to be used by the seller in performance of the
contract (s 3(1)).
Þ
No substitution, not even with goods that are
identical to the contract goods, is permissible.
Þ
E.g., the seller’s 2010 Hyundai Santa Fe; a
particular clothes dryer or dishwasher in the
seller’s home; the seller’s cat “Russell”.
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• Unascertained goods:
Þ
Goods that are sold under a description and
no particular goods are identified and agreed
upon at the time when the contract was made
— i.e., goods that have not yet been
specifically appropriated to the contract.
Þ
Goods that have been identified and
unconditionally appropriated to the contract of
sale (i.e., after the time the contract of sale is
made (hence their differentiation from specific
goods)).
Þ
Three types:
Þ
When in a contract for the sale of unascertained
goods, the parties agree which goods are to be
subject of the contract, the goods become
ascertained.
Þ
Future goods (above);
Þ
Generic goods of a class as described
(e.g., “100 tonnes of wheat”): the goods
are sold on terms that preserve the
seller’s freedom to decide for him- or
herself how and from what source he or
she will obtain goods answering the
contractual description;107
Þ
107
108
109
• Ascertained goods:
Case-law illustrations on the distinction between
ascertained and unascertained goods:
– In re London Wine Co (Shippers) Ltd [1986] PCC
121
Quasi-specific goods (or “goods sold
ex-bulk”): i.e., an undifferentiated part
(generic) of a specific bulk (= a “fixed
and predetermined source from within
which the seller may make his or her own
choice … but outside which he or she may
not go”108) — e.g., “100 tonnes of wheat
out of a larger quantity presently in my
warehouse at Bundaberg” — the wheat to
be sold has not yet been identified and
separated from the bulk from which it is to
be drawn or has not yet been earmarked
for the buyer, but the specific bulk has at
least been identified).109
In re Goldcorp Exchange Ltd [1995] 1 AC 74, 89.
Ibid.
Note that there are special provisions in the New South Wales and South
Australian Sale of Goods Acts that deal with the rights of buyers of goods where
some or all of the goods form part of a single bulk quantity of goods of the same
kind: NSW, s 25A; SA, s 20A.
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•
The company was holding substantial stocks of wine in a number
of warehouses, most of which (stocks) had been sold to customers
under a scheme whereby customers could purchase quantities of
wine for investment.
•
The wine was held in bulk in the warehouses, and the purchases
were entered into the company’s stock book and assigned an
identification number.
•
Customers then received from the company a “certificate of title” in
respect of the wine for which they had paid, and each certificate
described the customer as “the sole and beneficial owner” of the
wine in question.
•
One customer had purchased the entire stock of a particular wine;
in other cases, a number of contracts were entered into with a
number of customers that exhausted the company’s entire supply
of a particular wine.
•
However, there had been no appropriation from the bulk of any
wine to answer any particular contracts of sale with customers.
•
When receivers were appointed over the company, the question of
ownership arose; sufficient stocks existed to satisfy all claims.
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•
The customers (unsecured creditors) argued that they should be
able to claim the wine that they had paid for; however, if the
company owned the wine, the receiver who acquired the wine
under a floating charge would be free to dispose of it.
•
The relevant customers argued that, under [s 19 of the Sale of
Goods Act], the goods had been ascertained by being set aside
from the company’s trading stock, and so property had passed to
them.
•
Held: The customers’ claims failed; the company did not hold any
of the wine in trust for the customers (there could be no trust
without certainty of subject matter); the customers had no
proprietary right over any of the wine even though they had paid
for it; title had not passed, and that followed even if a single buyer
had bought the total stock of a particular wine, a number of buyers
had through their combined purchase exhausted the total stock of a
particular wine, or a number of buyers had not through their
combined purchase exhausted the relevant stock; there had been
no ascertainment of the subject matter of the contracts (as that
could not happen unless and until there was an intention to attach
specific goods irrevocably to the particular contracts); where there
were a number of purchasers of the same kind of wine, it was
impossible to know who owned which wine held by the company;
and even where there was a single customer in respect of the
entire stock of a particular wine, such orders could still have been
fulfilled from any available source, not necessarily the company’s
existing stocks (and so there was not even an ascertained bulk in
this case).
•
Held: The wine belonged to the customers, who had paid for it; in
contrast to the wine in Re London Wine Co (Shippers) Ltd, the wine
here had been completely set aside in the warehouse as “nontrading stock”, which was sufficient to show that the goods had
been ascertained; although the goods hadn’t been immediately
appropriated to each individual customer, property had nonetheless
passed by the common intention of the parties (i.e., [s 20] and not
pursuant to Rule 5 of [s 21] of the Act (later)) when the goods were
set aside for storage, the customers taking the goods as tenants in
common of the whole (intermixed) stack in the proportion that their
cases bore to the total number of the cases in the stack for the time
being; the arrangement to store the goods indefinitely thereafter
had its own consideration and so was treated as a contract
separate from the contract of sale under which property had
passed by ascertainment of the goods (i.e., a separate contractual
bailment).
– In re Goldcorp Exchange Ltd [1995] 1 AC 74 (PC)
Compare:
– Re Stapylton Fletcher Ltd [1994] 1 WLR 1181
•
One of the companies concerned was a wine merchant that sold
wine to customers; the customers paid for the wine and then left it
with the company for storage (as bailees in return for rentals),
drawing out at will.
•
Unlike what occurred in Re London Wine Co (Shippers) Ltd, this
company physically segregated these “reserve” stocks from the
company’s generic trading stock, storing it in a separate part of the
warehouse, in a “customers’ reserve area”.
•
Although the wine was stacked in the warehouse according to type
and vintage, and not marked with individual customers’ names,
proper paperwork was nevertheless maintained (a regularly
updated and accurate master card index that showed the names of
customers and the number of cases allotted to each).
•
Also, it was clear that the company did not regard the wine as
belonging to it, as they were specifically excluded from statements
of the company’s assets for borrowing purposes.
•
Administrative receivers were appointed to the company, and the
receivers applied to the court for a direction as to ownership of the
wine.
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•
Goldcorp dealt in gold and other precious metals and it invited the
public to buy gold and other bullion as an investment.
•
It sold non-allocated metal to private investors for future delivery
(i.e., customers’ metal would not be set aside but simply stored in
bulk alongside the rest of the company’s overall stock of bullion
until the investor called for delivery under their contract).
•
The company’s glossy brochure said:
“Basically, you agree to buy metal at the prevailing market rate
and a paper transaction takes place. [The company] is
responsible for storing and insuring your metal free of charge and
you are given a ‘Non-Allocated Invoice’ which verifies your
ownership of the metal. In the case of gold or silver, physical
delivery can be taken upon seven days’ notice and payment of
nominal delivery charges.”
•
Investors who purchased metal on a non-allocated basis received a
certificate stating:
“This is to certify that [name] is the registered holder of [quantity]
fine gold. The above metal is stored and insured free of charge by
Goldcorp Exchange Ltd on a non-allocated basis. Delivery may be
taken upon seven days’ notice and payment of delivery charges.
The owner shall be entitled to the collection of the bullion, or funds
from the sale of bullion, only upon presentation of this certificate.”
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•
In addition, the company’s employees promised investors that the
company would maintain a separate and sufficient stock of each
type of bullion to meet their demands, but it did not.
•
When the company became insolvent the Bank of New Zealand
appointed a receiver over the business under a debenture issued
by the company and took charge of the company’s assets.
•
Not only did the company have insufficient assets to meet its
liabilities to the bank, it also transpired that it had, despite its
multiple assurances, not held nearly enough stock to satisfy the
contracts of over 1,000 private investors who believed they had
purchased gold deliverable on seven days’ notice.
with an immediate transfer of title to goods whose identity is not yet
known.”
Lord Mustill (p 90)
The Transfer of Property from Seller to Buyer
•
The non-allocated investors claimed that title in the gold remaining
in stock had passed to them under the various contracts of sale
immediately upon the making of the purchases, or else the
company held it in trust for them.
•
The bank’s reply was that since the gold stocks had never been
isolated, no beneficial interest could pass, either in law or in equity,
to the non-allocated investors and they were merely unsecured
creditors subordinated in priority to the bank’s floating charge.
•
Held: No title to the bullion had passed to the non-allocated
claimants in law immediately upon the making of the purchases by
virtue of the contracts, and for the same reason there was no
identifiable property that could render possible the creation of a
valid trust (i.e., beneficial ownership in equity); until the bullion had
been segregated from the bulk and appropriated to each
customer’s contract, the contracts were for the sale of
unascertained generic goods and the company was free to
supply them from any source (Lord Mustill wholeheartedly
approved of the reasoning in In re London Wine Co (Shippers) Ltd
(above)); by virtue of [s 19] of the Sale of Goods Act, title thus
remained with the company, which title was subject to the bank’s
proprietary interest that had crystallized in its favour under the
debenture/floating charge and which took priority over the
unsecured personal claims of the non-allocated investors.
“It is … convenient to pause for a moment to consider why the
answer [to whether property in the metal had passed immediately
under the contracts of sale] must inevitably be negative, because
the reasons for this answer are the same as those which stand in
the way of the customers at every point in the case. It is common
ground that the contracts in question were for the sale of
unascertained goods. …
Approaching these situations [of unascertained goods] a priori
common sense dictates that the buyer cannot acquire title until it is
known to what goods the title relates. Whether the property then
passes will depend upon the intention of the parties and in
particular on whether there has been a consensual appropriation of
particular goods to the contract. … It makes no difference what the
parties intended if what they intend is impossible: as is the case
• Recall the definition of a contract of sale of goods: “a
contract whereby the seller transfers or agrees to
transfer the property in goods to the buyer for a money
consideration, called the price” (s 4(1)).
Þ
“Property in the goods” here means “general
property” — i.e., “ownership” — and not merely
“special property” (possession).
• Bear in mind that transfer of the ownership in the goods
does not depend on delivery of possession to the buyer: a
change in ownership may occur without a change in
possession (just as a change in possession may occur
without a change in ownership (i.e., bailment)).
• Why might it be important to know exactly when
property in the goods passes from seller to buyer?
Þ
Risk generally passes with ownership, and so
this becomes important should the goods
deteriorate or become lost or damaged without the
other party’s default.
Þ
If one of the parties becomes bankrupt or goes
into receivership, it is necessary to know
whether the goods will vest in the trustee in
bankruptcy/receiver (i.e., whether the goods will
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form part of the bankrupt’s/insolvent party’s assets
available to satisfy the claims of creditors).110
Þ
Þ
110
• The general rules as to transfer of property between
seller and buyer are contained in Part 3, Division 1 of the
Act (i.e., ss 19–23).
Available remedies: If ownership has passed to
the buyer, the seller may sue for the price of the
goods if the buyer wrongfully refuses to accept or
pay for the goods (otherwise only a claim for
damages for non-acceptance will lie); similarly, if
ownership had passed to the buyer and the
seller wrongfully disposes of the goods to a
third party, the buyer may sue for conversion of
the goods (but not if ownership hasn’t passed to
the buyer, in which case only a claim for damages
for non-delivery will lie).
GOODS MUST BE
ASCERTAINED
ß
PROPERTY PASSES WHEN THE
PARTIES INTEND FOR IT TO PASS
ß
The party who has ownership of the goods can
pass ownership to a third party (even if the first
party has not yet paid for the goods or is not in
possession of them).
RISK GENERALLY PASSES AT
THE SAME TIME AS PROPERTY
Þ
Generally, if ownership in the goods has passed
to the buyer, the buyer cannot reject them for
breach of condition; she or he can only treat the
breach of condition as a breach of warranty and
recover damages accordingly (s 14(3)).
THE EFFECT OF ROMALPA /
RETENTION-OF-TITLE
CLAUSES111
Þ
Miscellaneous other reasons (e.g., tax and
licensing requirements; the law of theft).
ß
Unascertained or Future Goods
Þ I.e., the goods are defined by description but not
identified or in existence at the time of contracting.
A good (and well-known) example of this is Re Wait [1927] 1 Ch 606: W bought
1000 tons of wheat and resold 500 tons to a buyer who paid him in advance; but
before the 500 tons had been separated and appropriated to the contract, W was
declared bankrupt, meaning that all his property vested in the trustee in
bankruptcy; the buyer could not claim the 500 tons because the wheat was still
unascertained; thus, it belonged to the trustee, leaving the buyer simply to
prove in W’s bankruptcy along with all the other creditors of W. (Again, this is
subject to the “bulk goods” provisions in New South Wales (s 25A) and South
Australia (s 20A)).
19 Goods must be ascertained
When there is a contract for the sale of unascertained goods no
property in the goods is transferred to the buyer unless and until the
goods are ascertained.
111
This was considered earlier and will not be revisited here.
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• So long as the contract remains one for the sale of
unascertained goods, it is merely “an agreement to
sell”; until the contractual subject matter becomes
specifically identified and is unconditionally
appropriated to the contract, nothing exits that can be the
subject of a “sale” and over which ownership can pass.
•
Accordingly, an issue arose as to whether property in the fish —
hence risk as to their loss or deterioration — had passed to H&S,
the buyer (there being no express contractual regulation of this
matter inter partes).
•
Held: Since the precise 20 boxes had not been specifically
identified and unconditionally appropriated to the contract before
the fish went off, the goods were unascertained when they became
of unmerchantable quality; property had accordingly not passed in
any particular 20 boxes to H&S, and so H, the seller, bore the risk
of the loss and could not recover the price (H&S were entitled to
reject the goods).
• Section 19 applies regardless of what the parties happen
to agree as to the passing of property.
Specific or Ascertained Goods
Illustrations from the case law:
– Jansz v GMB Imports Pty Ltd [1979] VR 581
•
• The fundamental rule is that the contract governs:
A tobacco wholesaler agreed to sell tobacco to the value of $2m to
a retailer; however, the agreement provided:
“Delivery in brands and quantities to be advised; payment 7 days
from delivery; property in the above goods passes to purchaser upon
signing hereof; goods are hereafter at risk of purchaser.”
•
At the time of making the contract the wholesaler did not possess
the requisite quantity of tobacco, but it was able to access supply
from a third-party wholesaler on three days’ notice during the
contract period, from which it could fulfill its retailers’ orders.
•
Despite the agreement purporting to pass property in the whole
amount immediately, the Court held that the contract was not a
sale, merely an “agreement to sell”, because the goods had not
been ascertained and appropriated to the contract in a manner
binding on the parties; accordingly, property in the goods could not
pass at that time.
20
(1)
Property passes when intended to pass
When 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 intended it to be transferred.
(2)
For the purpose of ascertaining the intention of the parties regard is
to be had to the terms of the contract, the conduct of the parties,
and the circumstances of the case.
• If (and only if) the parties have not expressed any
intention as to when property passes, the Act contains, in
s 21, five prima-facie rules for ascertaining intention.
The “s 21 Rules” for Ascertaining Intention
– Healy v Howlett & Sons [1917] 1 KB 337
•
H&S, who were fish salesmen, ordered 20 boxes of mackerel from
H, who was a fish exporter.
•
To fulfil the order H sent 190 boxes by rail and instructed the carrier
(railway company) to deliver 20 of them to H and the rest to other
customers.
•
But when the train was delayed, a boat intended to carry the fish
the rest of the journey was missed, and by the time H&S received
the consignment, it had spoiled.
•
H&S refused to pay for the fish and H sued for the price.
21 Rules for ascertaining intention
Unless a different intention appears, the following are rules for
ascertaining the intention of the parties as to the time at which the
property in the goods is to pass to the buyer —
• “Unless a different intention appears …” — note, again,
that these are general “default” rules and commercial
parties commonly make differing provision in their
contract of sale.
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Illustrations from the case law:
• The first four rules relate to specific goods, whereas the
fifth rule is directed at unascertained or future goods.
– Kursell v Timber Operators and Contractors Ltd
[1927] 1 KB 298
Rule 1
•
When 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, is or are postponed.
The parties entered into a contract for the sale of all the timber of
a specified dimension growing in a certain forest in the Republic
of Latvia.
•
The buyers, who paid £30,000 in advance, were admitted into
possession of the forest, began to cut the timber and were given
15 years under the contract in which to cut and remove it.
•
However, approximately one month after the contract date the
Latvian Government lawfully appropriated the forest to itself,
rendering illegal the continued performance of the parties’
agreement.
•
By the time the buyers’ felling ceased, they had felled
approximately two million cubic feet of timber (as they continued
felling for a further few months with the consent of the
Government).
•
The sellers claimed that the buyers profited significantly from this
arrangement and sued for additional payments over and above
the initial £30,000 received, but they could not recover unless, at
the time when the commercial objective of the agreement had
been frustrated, property (hence risk) had already passed to the
buyers (i.e., immediately at the date of the agreement).
•
Held: The contract was not one for the sale of specific goods in
a deliverable state within the meaning of Rule 1, as the goods in
question were neither identified nor agreed upon; under the
agreement, property in every tree in the forest was not to pass to
the buyers, only property in those trees that were “merchantable”
(i.e., trees that met the contract size specifications); the timber
was thus not in a deliverable state until it was measured and cut;
the buyers could not under the definition in Rule 1 be bound to
take delivery of an undetermined part of a tree that was not yet
identified, and so property had not passed immediately at the
date of the agreement; when the contract was frustrated,
therefore, the timber was not at the risk of the buyers.
Þ
The phrase “in a deliverable state” means that
the goods “are in such a state that the buyer
would under the contract be bound to take
delivery of them”: s 3(4) (e.g., seller has
performed final adjustments or alterations or has
packed the goods pursuant to the contract).
Example:
You go into a shop and purchase an iPhone, which you select
from behind a glass cabinet. You authorize the retailer to debit
your account and agree to collect the iPhone tomorrow
morning.
Þ
Property in the iPhone passed to you immediately even
though you neither paid for the iPhone nor took delivery
of it.
Contrast:
Same facts but instead you instruct the retailer to deliver the
iPhone to a specified place for you to collect.
Þ
Property would not have passed to you because
delivery to the specified place is necessary to put the
goods “in a deliverable state”.
– Bodilingo Pty Ltd v Webb Projects Pty Ltd (1990)
ASC ¶56-001 (NSWCA)
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•
S agreed to sell office equipment to B for a price of $360,000
payable by equal monthly instalments of $36,000 each.
•
B defaulted after paying the first five instalments and S sought to
reclaim the equipment, arguing that property in the equipment
had not passed to B (despite it having been delivered to B).
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•
The parties’ agreement contained no express provision either for
the passing of property to B or for the retention of title by S until
the price had been paid in full.
•
The contract required the seller to detach and dismantle the
machine — a difficult, lengthy and costly process — and load it
onto a railway truck for delivery to the buyer.
•
Clause 1 of the agreement for the sale of goods provided:
•
The seller detached the machine but it was badly damaged during
loading and so the buyer refused to accept it.
•
The seller sued for the price.
•
Held: The seller could not recover the price because property
never passed to buyer; as the machine hadn’t been safely loaded
onto the railway truck, as the seller was bound to do, it was not “in
a deliverable state” when the damage occurred; applying Rule 2,
property, hence risk, remained with the seller, who had to carry the
loss.
“The vendor as beneficial owner … hereby sells and the
Purchaser hereby purchases the Equipment and the said
computer programme copyright for the sum of …”
Held: S could not reclaim the equipment, as it was now owned
by B; the contract was an “unconditional contract for the sale of
specific goods in a deliverable state” and S had not reserved
title; the parties’ agreement revealed no contrary intention to
displace Rule 1, and indeed Clause 1 of the agreement on its
face purported to effect an immediate transfer of the property in
the equipment to the purchaser, despite delivery being
contemplated “on completion” later; property had thus passed to
B.
•
“A ‘deliverable state’ does not depend upon the mere completeness
of the subject matter in all its parts. It depends on the actual state of
the goods at the date of the contract and the state in which they are
to be delivered by the terms of the contract. Where the vendors
have to expend as much trouble and as much money as the
appellants had to expend before this engine could be placed on rail,
I cannot think that the subject matter can be said to be in a
deliverable state.”
Banks LJ (p 345)
Rule 2
When there is a contract for the sale of specific goods and the seller is
bound to do something to the goods for the purpose of putting them into
a deliverable state, the property does not pass until such thing is done
and the buyer has notice thereof.
Rule 3
When there is a contract for the sale of specific goods in a deliverable
state, but the seller is bound to weigh, measure, test, or do some other
act or thing with reference to the goods for the purpose of ascertaining
the price, the property does not pass until such act or thing is done and
the buyer has notice thereof.
Example:
You buy an off-the-shelf suit from a retailer but it must first be
altered to fit you.
• Rule 2 (as well as Rule 3, below) complements the
“deliverable state” requirement in Rule 1.
Example:
You buy the entire but unmeasured pile of onions at a price per
kilogram where the seller must first weigh the onions in order to
determine the price to be paid.
Illustration from the case law:
– Underwood Ltd v Burgh Castle Brick and Cement
Syndicate [1922] 1 KB 343
•
The parties contracted for the sale of a 30-ton horizontal tandem
condensing engine that was bolted and embedded by its own
weight into the concrete floor of the seller’s premises.
• Note that, like Rule 2, Rule 3 only applies when it is the
seller who must do what is required; it does not apply
when it is the buyer who must do it.
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Þ
recovered without repayment of the sums advanced by the
purchaser, which is inconsistent with the buyer’s free power to
return them; pledging the goods was thus an act inconsistent with
the seller’s continuing title — the buyer ought not to have done it
unless he meant to treat himself as purchaser — and so he
“adopted the transaction” and acquired property in the jewellery,
putting him in a position to pass good title to the defendant.113
If it is the buyer who must do the act (with the full
authority of the seller), the goods will be deemed to
be in a deliverable state.112
• Both Rules 2 and 3 require notice to the buyer.
Rule 4(1)(b):
Rule 4
(1)
(2)
When goods are delivered to the buyer on approval or “on sale or
return” or other similar terms the property therein passes to the
buyer —
(a) when the buyer signifies the buyer’s approval or acceptance to
the seller, or does any other act adopting the transaction;
(b) if the buyer does not signify the buyer’s approval or acceptance
to the seller but retains the goods without giving notice of rejection,
then, if a time has been fixed for the return of the goods, on the
expiration of such time, and, if no time has been fixed, on the
expiration of a reasonable time.
What is a reasonable time is a question of fact.
– Poole v Smith’s Car Sales (Balham) Ltd [1962] 1
WLR 744
•
•
Almost three months passed and the car still hadn’t been sold.
•
P, after repeated earlier telephone requests for return of the car,
finally wrote to D demanding that D return the vehicle within three
days or pay him the £325 as a deemed sale.
•
D did not answer P’s letter or return the car for about another three
weeks and, when they did, it had been badly damaged in an
accident (one of D’s employees had used the vehicle without
authority for his own private use — he had clocked up about 1,600
miles on the odometer!).
•
P refused to accept the car and demanded the price of £325
instead.
•
Held: D had to pay the purchase price for the car; by the time P
demanded the vehicle’s return, a reasonable time for return had
passed (i.e., in the circumstances, D had retained the car for more
than a reasonable time); the Court took into account the seasonal
nature of the market in second-hand cars, the rapid depreciation in
value of second-hand cars in the autumn (after the holiday season
had ended), as well as D’s failure to respond to P’s continued
requests for return of the car; accordingly, under Rule 4(1)(b),
property in the car had passed to D.
Illustrations from the case law:
Rule 4(1)(a):
• Obviously, this will include any act or conduct indicating
unequivocally an intention to become purchaser, as
well as an act that is inconsistent with the continuation
of the buyer’s power to return the goods, e.g., pledging
the goods to a third party:
– Kirkham v Attenborough [1897] 1 QB 201
112
•
The plaintiff, a jewellery manufacturer, sent a large consignment of
jewellery to a buyer “on sale or return” terms.
•
However, the buyer went out and pledged the jewellery to the
defendant pawnbroker and disappeared.
•
The plaintiff brought an action against the defendant for return of
the goods or their value.
•
Held: The plaintiff seller’s action must fail: when the buyer pledged
the goods he “adopted the transaction” within the meaning of Rule
4, because once the goods were pawned they could not have been
Turley v Bates (1863) 2 H & C 200; 159 ER 83.
113
P, a motor dealer, left his car with D, another motor dealer, to sell
for £325 on a “sale or return” basis.
Compare Weiner v Gill [1906] 2 KB 574, where Rule 4(1)(a) was excluded by the
simple device of the seller including the following words in the sale-or-return
agreement: “[G]oods had on … sale or return remain the property of Samuel
Weiner until such goods are settled for”.
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– Atari Corporation (UK) Ltd v Electronics Boutique
Stores (UK) Ltd [1998] QB 539
•
• I.e., when the unascertained/future goods become
ascertained/existing goods and are “unconditionally
appropriated” to the contract, title in the goods passes
to the buyer immediately, even if she or he fails to take
possession of them until some later time.114
EBS purchased computer games and hardware (as trading stock)
from Atari under a contract providing for “Full S.O.R. [sale or return]
until 31 January 1996”.
•
EBS did not pay for the goods by the due date.
•
However, on 19 January 1996 EBS had written to Atari advising of
its intention to cease stocking some of the goods and that it would
be collecting the stock from its various stores and returning it to its
(EBS’s) central warehouse in order to enable the preparation of a
detailed list of returns.
•
Atari denied EBS’s right of return, arguing that such a right was lost
because EBS had missed the due date for payment and that the
reject letter foresaw that some future act by EBS (preparation of the
returns list) was necessary for the completion of any rejection.
•
Atari applied for summary judgment for the price.
•
Held: Atari must accept the return because EBS had issued a valid
(clear and timely) notice exercising the right of rejection of the
unsold goods; when goods are delivered on a sale-or-return basis,
the buyer holds them as a contractual bailee, and it suffices that a
notice of rejection is given before the time fixed by the contract for
return of unsold goods, provided, too, that the goods are still
capable of identification; moreover, it is not necessary for the
goods to be physically returned (or be physically capable of such
return) when the notice of rejection was issued, provided they are
capable of being collected within a reasonable period thereafter.
• “Unconditional appropriation” has been said to occur at
the time the seller performs his or her last major
contractual responsibility (which is usually delivery
under Rule 5(2)).
• The act of appropriation must be a final one; i.e., the word
“unconditional” has been interpreted in modern times in
a way that is synonymous with “physically irrevocable”.
Illustrations from the case law:
Rule 5(1):
– Pignataro v Gilroy [1919] 1 KB 459
•
P agreed to buy 140 bags of rice from D; it was a sale by sample but
the particular bags that were to satisfy the contract were not
ascertained at that time.
•
P sent a cheque for the price and, in response to P’s request, D on
the following day sent P a delivery note allowing P to collect 125
bags from the wharf; an accompanying letter also stated that the
remaining 15 bags were available for collection from D’s premises.
•
Not for a month did P attempt to take delivery of the 15 bags, but
when they did they discovered that the bags had been stolen
meantime.
•
P sued for the value of the missing rice (an action for damages for
non-delivery of the 15 bags).
•
Held: By advising P that the goods were ready for collection, the
seller had unconditionally appropriated them to the contract with the
implied assent of P (P having made no objection to D’s
Rule 5
(1)
When 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 thereupon
passes to the buyer.
(1A) Such assent may be express or implied, and may be given either
before or after the appropriation is made.
(2) When, in pursuance of the contract, the seller delivers the goods to
the buyer or to a carrier or other bailee (whether named by the
buyer or not) for the purpose of transmission to the buyer, and
does not reserve the right of disposal, the seller is deemed to have
unconditionally appropriated the goods to the contract.
114
In Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyds’ Rep
240, 255, Pearson J observed that “an appropriation by the seller, with the
assent of the buyer, may be said always to involve an actual or constructive
delivery [of the goods]. If the seller retains [actual] possession, he does so as
bailee for the buyer.”
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correspondence); hence, property (and risk) had passed to P, the
buyer, even though it remained for the seller to allow the buyer to
enter the premises and to cooperate in the removal of the rice.
– Carlos Federspiel & Co SA v Charles Twigg & Co Ltd
[1957] 1 Lloyds’ Rep 240
•
The plaintiff agreed to buy a number of bicycles and tricycles “f.o.b.
[free on board] Liverpool” from the defendant.
•
The plaintiff paid for the goods and the defendant prepared them for
shipment, including marking the crates with the destination port and
the plaintiff’s name (i.e., awaiting the call of a ship bound for Costa
Rica).
•
However, the defendant then went into receivership and the receiver
refused to ship the goods.
•
The plaintiff claimed the goods, arguing that they had been
“unconditionally appropriated” to the contract and hence property
had passed (meaning that the receiver could not refuse shipment).
•
Held: Property had not passed to the plaintiff buyer; although
preparations had been made to ship the goods, that did not amount
to “unconditional appropriation”, as the defendant seller could have
changed its mind and used the goods to satisfy some other contract,
or indeed used different goods to fulfil the plaintiff’s one; the goods
had not yet been delivered to the carrier; it didn’t matter that the
seller had reached a clear decision to use the particular goods in the
crates in fulfilment of the contract, since there was nothing to prevent
the seller from changing its mind and breaking open the crates;
although the goods had been “earmarked” for the contract, this was
not in an irrevocable way.
“[For the purpose of passing of property] … [a] mere setting apart or
selection by the seller of the goods which he expects to use in the
performance of the contract is not enough … [U]sually, but not
necessarily, the appropriation act is the last act to be performed by the
seller.”
Pearson J (p 255)
•
Rule 5(2):
– Wardar’s (Import & Export) Co Ltd v W Norwood &
Sons Ltd [1968] 2 QB 663
•
On 13 October, the plaintiffs contracted to buy 600 cartons of frozen
ox kidneys from the defendants, the goods being 600 cartons of a
consignment of 1,500 cartons stored in a third party’s cold store.
•
The plaintiffs’ carrier arrived to collect the goods at 8 am on 14
October; they handed over the delivery note (i.e., authority from the
defendants/sellers addressed to the cold store to pick up the 600
cartons) and began loading the goods, which had been placed on
the pavement outside the cold store.
•
By the time loading was completed at noon, some of the cartons had
begun to defrost; indeed, the carrier had noticed the cartons dripping
at 10 am during its morning tea break; he switched on the lorry’s
refrigeration (which would not have become effective until around 1
pm).
•
The plaintiffs’ carrier then signed a receipt for the goods, adding a
note that they were received “in soft condition”.
•
By the time they were delivered to the plaintiffs the next day, the
kidneys were no longer fit for human consumption.
•
The plaintiffs sued the defendants in respect of other transactions
and the defendants countersued for the price.
•
The Court had to decide who owned the kidneys (hence on whom
the risk of loss fell) at the time they deteriorated; the trial judge held
that the risk of deterioration in the kidneys did not pass until they had
been loaded into the carrier’s truck and that the kidneys were
damages before that (i.e., when they became too hot while standing
on the pavement).
•
Held: As this was a contract for unascertained goods (i.e., 600
cartons purchased out of a total of 1,500 cartons), property in them
could not pass until they were ascertained; that occurred when the
600 cartons were taken out of the cold store and placed on the
pavement outside some time before 8 am on 14 October; under Rule
5(2), property in the goods passed to the buyer when at 8 am they
were acknowledged by the cold storage official to be the buyer’s
property, which occurred when the carrier handed over the delivery
note to the cold store owner and was permitted to commence
loading; since the thawing of the goods occurred after that time, the
goods were at the plaintiffs’ risk at the relevant time and so its action
failed and the plaintiffs had to pay the price.
Here, the “important and decisive act” remained to be done by the seller,
who was to send the goods to the port of shipment and have them
shipped. Accordingly, property had not passed
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– Demby Hamilton & Co Ltd v Barden [1949] All ER 435
The Passing of Risk: s 23
• “Risk” here refers to the risk of accidental loss,
deterioration or damage to the goods.
23
(1)
(2)
Risk prima facie passes with property
Unless otherwise agreed, the goods remain at the seller’s risk
until the property therein is transferred to the buyer, but when
the property therein is transferred to the buyer, the goods are at
the buyer’s risk whether delivery has been made or not.
However, when delivery has been delayed through the fault of
either buyer or seller the goods are at the risk of the party in fault
as regards any loss which might not have occurred but for such
fault.
This section does not affect the duties or liabilities of either seller
or buyer as a bailee of the goods of the other party.
•
B agreed to buy 30 tons of apple juice by weekly instalments from S
but, after receiving some weekly deliveries, B told S to delay delivery of
the remaining instalments.
•
The balance of the contract quantity of juice then went bad.
•
Held: Although property in the goods had not passed to the buyer, that
was only in virtue of the fact that he had asked for delivery to be
delayed; the goods were thus at the buyer’s risk and the seller was
entitled to the price.
– Allied Mills Ltd v Gwydir Valley Oilseeds Pty Ltd [1978]
2 NSWLR 26
•
The parties entered into a contract of sale for 130 tonnes of linseed
meal, at $55 per tonne, that was in the seller’s store; the contract
stipulated that property was to pass to the buyer upon the making of
the contract (thus the seller was a bailee for reward until the time for
delivery arrived).
•
The seller then wrongfully failed to deliver the goods within the period
stated in the contract and the goods were subsequently destroyed by
fire while still in the seller’s store.
•
Because the buyer had resold the goods, it was forced to enter the
market to obtain alternative meal at a price of $85 per tonne in order to
fulfil its own contracts to customers.
Illustrations from the case law:
•
– Bevington and Morris v Dale & Co Ltd (1902) 7 Com
Cas 112
The buyer therefore sued the seller for damages representing the
difference between the contract price for the goods and the market
price that it had to pay for the replacement meal.
•
Held: Owing to the seller’s wrongful delay (breach of contract), the
goods were at the seller’s risk “as regards any loss which might not
have occurred but for such fault”, and so the seller, who as bailee was
unable to show that the loss occurred without its fault (or otherwise due
to a cause beyond its control), was liable to compensate the buyer for
the extra $30 per tonne that the buyer had to pay for replacement meal;
the buyer’s loss would not have occurred but for the seller’s default — if
the seller had complied with the terms of the contract, the goods would
not have been in the place where the fire occurred.
(3)
• The opening words “unless otherwise agreed” make it
clear that s 23(1) operates as a general default rule only
and that the parties are free to alter the risk position either
expressly or by implication.
•
S delivered furs to B “on approval”.
•
The furs were stolen while in B’s possession (and before the time for
approval had expired), and S alleged that they were at B’s risk even
though property in the goods had not yet passed.
•
A long-established custom existed in the fur trade whereby goods
delivered “on approval” were at the buyer’s risk.
•
Held: The parties had, by their implied contrary intention, overridden
the general rule that the goods remain at the seller’s risk until
ownership had passed to the buyer.
• Note also that if the parties agree that as from a certain
time the goods are to be at the buyers’ risk, an inference
follows that property in the goods is also to pass to the
buyer at that time.115
115
McPherson Thom Kettle & Co v Dench Bros [1912] VLR 437 (heifer sold by
auction but the animal went missing before delivery to the buyer; seller sued for
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desideratum of commercial security (i.e., for
innocent third parties).
The Transfer of Title by a Non-Owner of the Goods
• Note that Part 3, Division 1, of the Sale of Goods Act (i.e.,
ss 19–23, above) governs the relations between buyer
and seller with respect to the transfer of property in the
goods; it does not deal with the rights of third parties
who may contract to buy the goods from the buyer or
the seller.
• Title disputes typically demonstrate a clash between two
fundamental legal policies: (1) protection of private
property (favouring the owner); and (2) promotion of
security in contractual dealings (favouring bona fide
third-party purchasers without notice).
“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 for the protection of
commercial transactions: the person who takes in good faith and for
value without notice should get 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.”
Bishopgate Motor Finance Corp v Transport Brakes Ltd
[1949] 1 KB 322, 336–7 (Denning LJ).
Overview:
Demo Dat Rule
“No one can pass a better title than
the one they have.”
s 24(1) SOGA
Exceptions to the Rule
Estoppel: s 24(1)
By representation
Sale by Mercantile Agent: s 24(2)(a)
By negligence
Sale under Common Law
or Statutory Power: s 24(2)(b)
Seller in Possession after Sale: s 27(1)
Buyer in Possession after Sale: s 27(2)
• Third parties’ rights are governed by Division 2 of Part 3,
i.e., ss 24–28 of the Act.
Sale under Voidable Title: s 25
• A pragmatic balance is needed.
Þ
The law has started from the policy of property
protection — expressed in the Latin maxim nemo
dat quod non habet — but upon that general rule
the law has engrafted a number of exceptions
designed to give appropriate weight to the
price; the conditions of sale stipulated: “All lots shall be at risk of purchaser after
the fall of the hammer”; held: property passed to buyer after fall of the hammer).
The Nemo Dat Rule
24
(1)
Sale by person not the owner
Subject to the provisions of this Act, when goods are sold by a person
who is not the owner thereof, 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 the owner’s conduct precluded from denying the seller’s authority to
sell.
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(2)
apply118 if and to the extent that they are inconsistent
with the later Act: PPSA, s 254(1) — the PPSA’s “antioverlap” provision.
This Act does not affect —
(a) the provisions of the Factors Act, or any enactment enabling the
apparent owner of goods to dispose of them as if the apparent owner
were the true owner thereof;
(b) the validity of any contract of sale under any special common law or
statutory power of sale or under the order of a court of competent
jurisdiction.[116]
Þ Unlike some other PPSA jurisdictions, the sale-ofgoods legislation in the Australian States and
Territories has not been amended to narrow the
scope of the nemo-dat exceptions so as to avoid
conflict with the PPSA.119
• Note, also, the concept of “feeding of title”, whereby a
defective title is cured ex post facto. For example:
Þ
Þ
The party purporting to sell doesn’t actually have
title (e.g., the car being sold is on hire-purchase),
but subsequently acquires good title (e.g., by
paying out the hire-purchase contract so that title
finally passes from the finance company).
Estoppel:
• Section 24(1): “… unless the owner of the goods is by
the owner’s conduct precluded from denying the
seller’s authority to sell.”
The seller’s newly acquired title then automatically
and instantly feeds through down the purchasing
chain to the current owner, perfecting the current
owner’s title and curing any defects in the title of
any previous buyers whose title derived from that
of the original seller/non-owner of the vehicle.117
• Section 24 aims primarily at those cases where the
true owner has represented in words or by conduct
that the seller is the owner (“ostensible ownership”)
or has authority to sell (“ostensible agency”).
Þ
Exceptions to the Nemo Dat Rule
• Note that most of the exceptions aim to protect innocent
purchasers who are misled by a seller’s apparent
physical possession of the property (or documents of
title) that is the subject of the sale.
• Note, too, that a number of the Act’s exceptions are now
affected by the operation of the Personal Property
Securities Act 2009 (Cth) (“PPSA”) and they will not
116
117
Ideally, s 24(2) should be amended to add “(c) the provisions of the Personal
Property Securities Act 2009 enabling a purchaser of goods to acquire good title
to the goods”. Compare Sale of Goods Act 1908 (NZ), s 23(2)(c).
See Patten v Thomas Motors (1965) 66 SR(NSW) 458.
118
119
i.e., the owner will be estopped (prevented,
precluded) from denying the validity of the title of a
third party where she or he has allowed an
unauthorized individual, who may be exceeding
a limited authority or purporting to exercise a
non-existent authority, to appear to be acting
with authority, or indeed to appear as the
owner, in relation to disposal of the subject matter
of the sale.
Indeed, applying s 109 of the Australian Constitution, they are invalid to the
extent of the inconsistency.
See, e.g., Sale of Goods Act 1908 (NZ), ss 23(2)(c), 27(1A), (2A); Mercantile
Law Act 1908 (NZ), s 3(1A) (mercantile agents rule does not apply to a PPSA
security interest, but only if that interest is perfected). One author has even
argued that the PPSA provisions are so wide as to leave little continuing
relevance for the Sale of Goods Act exceptions: Denise McGill, “Transfer of title
by a non-owner: The Personal Property Securities Act 2009 (Cth) exceptions to
the nemo dat rule” (2011) 39 Australian Business Law Review 209.
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normally suffice to raise an estoppel against the
true owner; there must be either:
“[Section 24(1)] creates a statutory estoppel. An owner may
be precluded from denying the seller’s authority by reason of
his conduct which, expressly or impliedly, constitutes an
unambiguous representation to the buyer that the seller has
his authority to make the sale. … In some cases, the
omission of the owner to take steps to prevent the sale may
also estop him from asserting his title. But inaction, silence,
or even gross carelessness in the protection of property is
not of itself enough to preclude an owner from asserting his
title …”120
– An unequivocal representation by the true
owner of ownership or authority in the seller,
upon which representation the third-party
buyer acted to their detriment (i.e., by buying
the goods); or
= “Estoppel by representation”
– A breach of a duty of care owed by the true
owner to the third party, the effect of which
breach is to allow the seller to hold him- or
herself out as the owner, or as being
authorized by the owner to sell, on which
holding out the third-party buyer has acted
to his or her detriment (again, by buying the
goods).121
Þ The appearance of authority must be created by
the owner and not by the supposed agent him- or
herself.
Þ The third party carries the onus of showing the
ostensible authority so as to make out the
exception.
Þ The third-party buyer must of course acquire the
goods in good faith and without notice of the
seller’s actual lack of ownership or authority.
= “Estoppel by negligence”
Illustrations from the case law:
Þ Also, where an estoppel is found, the buyer
acquires a title to the goods against the whole
world, and not merely a right to plead an estoppel
against those who happen to be privy to the
representation or appearance-creating conduct of
the owner.
– Eastern Distributors Ltd v Goldring [1957] 2 QB 600
• Note that the critical requirement is culpable action
or inaction by the true owner that leads the buyer to
believe that the seller has a right to sell the goods.
Þ Simply “parting with possession” of the goods
(and/or the documents of title to them) so as to
afford the possessor of them a “practical
opportunity” to deceive others does not
120
121
Thomas Australia Wholesale Vehicle Trading Co Pty Ltd v Marac Finance
Australia Ltd (1985) 3 NSWLR 452, 469 (McHugh JA).
•
Murphy owned a Bedford van and wanted to buy a Chrysler car
from a car dealer, Coker.
•
Since Murphy did not have the money to pay the hire-purchase
deposit, Coker suggested that they tell the finance company
(Eastern Distributors) that Coker owned both vehicles and that
Murphy wanted to buy both of them on hire purchase (i.e., a sham
transaction).
•
Murphy signed the hire-purchase proposal forms that represented
Coker to be the owner of the van.
In other words, there has been negligence on the part of the true owner that has
effectively resulted in the buyer being misled as to the seller’s authority. But
merely being “careless” does not suffice — the owner must owe the buyer a duty
of care in relation to the buyer’s interests in the circumstances — a duty that is
hard to make out — and so she or he must exercise reasonable precautions
against the foreseeable outcome of the buyer being misled if those precautions
are not taken.
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•
happen innocently to deal with the goods; [s 24(1)] thus operated
to preclude Ielasi from denying the rogue’s authority to sell.122
Eastern Distributors, who acted in good faith throughout, accepted
the proposal for the van only, but instead of cancelling the deal
(as he told Murphy he had done), Coker, now quite without
authority, proceeded to sell the van to Eastern Distributors, Coker
receiving payment from Eastern Distributors for the same.
•
Eastern Distributors did not receive any of the contracted
instalments from Murphy (Murphy, of course, being told that there
was no such obligation), and it tried to repossess the van from
Murphy; meantime, however, Murphy had sold his business,
including the van, which had remained in his possession
throughout, to Goldring.
•
A title dispute broke out between Goldring and Eastern
Distributors, and the Court had to determine who had title to the
van.
•
Held: Eastern Distributors had acquired good title to the van — a
“real” and not merely “metaphorical” title by estoppel; by arming
Coker with the documents that enabled Coker to represent
himself to Eastern Distributors as the owner of the van, Murphy
had led an innocent third party without notice to believe that Coker
indeed owned the van and had the right to dispose of it, and so he
was estopped from denying Coker’s authority to sell; so when
Murphy purported to sell the van to Goldring, he had no title left to
pass to him.
“In my view the owner of goods of some substantial value who
permits possession of those goods to remain with a person whom
the owner knows to have acted dishonestly in relation to those
goods will, except in special circumstances, owe a duty of care to
others who might be minded to deal with that person in relation to
the goods. The duty arises on the basis of the known dishonesty
of the person in relation to those goods. The duty is not
negligently to mislead others into acting to their detriment in
relation to the goods. I have put the proposition in very narrow
terms (goods of substantial value, a person who has acted
dishonestly in relation to those goods), since I have no desire to
suggest a rule of general application in an area of such diverse
factual circumstances.”
Johnston J (p 517)
– Big Rock Pty Ltd v Esanda Finance Corp Ltd
(1992) 10 WAR 259:
•
A finance company/mortgagee of goods (a motor camper),
Esanda, wrote a letter to its borrower/mortgagor mistakenly
stating that the loan had been finalized and that it (Esanda) no
longer had an interest in the vehicle (when in fact the borrower
still had 46 repayments to make under the loan).
•
The borrower then sold the vehicle to Big Rock, who, before the
sale, searched the WA Register of Encumbered Vehicles and
discovered Esanda’s chattel mortgage over the car; however, Big
Rock was then shown the letter addressed to the borrower as
– Leonard v Ielasi (1987) 46 SASR 495
•
Ielasi owned a car and loaned it to a rogue; he allowed the vehicle
to remain in the possession of the rogue even after he knew the
rogue had dishonestly registered it in his own (the rogue’s)
name.
•
The rogue later disposed of the vehicle to a used-car dealer,
without Ielasi’s knowledge or consent, and the dealer then sold it
to Leonard, who was an innocent third party.
•
The car was eventually seized by the police and both Ielasi and
Leonard claimed ownership; accordingly, a title contest arose
between them.
•
Held: Ielasi was estopped from denying that the rogue had
authority to sell; his knowledge of the rogue’s dishonesty gave
rise to a duty in the owner to take steps to prevent third parties
from being misled; his permitting the rogue to retain possession of
the vehicle even after knowledge of his dishonesty, which
amounted to a recognition by acquiescence that the rogue had
some interest in the vehicle when in fact he had none; Ielasi’s
behaviour was not “responsible” and amounted to a breach of a
duty of care owed to Leonard, as well as to others who might
122
Millhouse J (at p 507) followed Lord Wilberforce’s test in Moorgate Mercantile Co
Ltd v Twitchings [1977] AC 890, 903: “What I think we are looking for here is an
answer to the question whether, having regard to the situation in which the
relevant transaction occurred, as known to both parties, a reasonable man, in
the position of the ‘acquirer’ of the property would expect the ‘owner’ acting
honestly and responsibly, if he claimed any title in the property, to take steps to
make that claim known to, and discoverable by the ‘acquirer’ and whether, in the
fact of an omission to do so, the ‘acquirer’ could reasonably assume that no such
title was claimed.” Johnston J opined that Lord Wilberforce’s test was “too
narrow”. He didn’t like the reference to “as known to both parties”. He concluded
(p 515): “The duty should arise in cases where there are special facts known to
the true owner, which relate to the seller, but which cannot, in the nature of
things, be within the compass of the knowledge of the acquirer if the seller acts
fraudulently.” For Johnston J, the decisive fact was not that Ielasi permitted the
rogue to remain in possession of the vehicle; it was, rather, that he did so well
knowing that the rogue had acted dishonestly in relation to that very vehicle.
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supporting his claim that the mortgage debt to Esanda had been
paid in full, and Big Rock accepted the letter as correct.
circulating in the market place (JM had put the losses down not to
possible theft, but rather to waste in the production process).
•
When Esanda learned of the sale, it sued Big Rock in conversion,
but Big Rock sought to defend on the basis of estoppel under [s
24(1)] — that Esanda was precluded by its conduct form denying
the borrower’s authority to sell.
•
In time the police became interested in Gaffney and Knight
because of their involvement with drugs, and when the police
discovered where the money for drugs was coming from, they
informed JM.
•
Held (by majority): The letter from Esanda was sufficient evidence
that the mortgage had been discharged and property in the goods
had been redeemed in the mortgagor/borrower; in order to
constitute “conduct” for the purposes of the estoppel exception, [s
24(1)] did not require that the letter be directed to a specific buyer
such as Big Rock — it could be a receipt or acknowledgment
directed to the person attempting to sell the goods; the letter was
sufficiently clear that it was reasonable for Big Rock to have relied
on the information disclosed therein, despite the knowledge it had
obtained from the register of vehicle owners — there was a
creation of “ostensible ownership” (rather than “ostensible
agency”); moreover, it was unnecessary to consider possible
negligence on Esanda’s part in the face of an unequivocal
representation as to title; accordingly, Esanda’s conduct was
sufficient to raise an estoppel in favour of Big Rock; its only claim
would lie against the dishonest borrower/seller (now bankrupt) —
it could not recover the vehicle from Big Rock, who was now its
derivative owner.
•
JM, as the true owner of the gold when it was stolen, sued D for
damages for conversion; D, however, raised a statutory defence
under [s 24(1)] of the Sale of Goods Act, that JM was estopped
by its own negligence in looking after the gold from denying that
Gaffney/Knight had been entitled to sell the stolen gold.
•
Held: The estoppel argument failed; D had to show that JM owed
them a duty of care that was breached (such breach also being
the proximate or real cause of the buyer being induced to
purchase the goods), and that this would occur in limited
circumstances only; merely being imprudent did not suffice; JM
was not aware that its gold had been stolen or was available in
the market place during the relevant period (and even if it did
know that, there was no established custom or trade usage
among gold dealers that this would create an expectation that JM
would take steps to notify dealers when gold was unaccounted for
or stolen); although there were problems with its internal security
measures, JM had done nothing by omission to positively
represent to D, or to engender the belief in D, that Knight owned
or had the right to sell the gold; there was, in the language of [s
24(1)], no “conduct [which] precluded [it] from denying the seller’s
authority to sell”; D was thus liable in conversion on each of the
65 occasions of purchasing the gold from Knight.
– Johnson Matthey (Aust) Ltd v Dascorp Pty Ltd
(2003) 9 VR 171
•
JM was a precious metals refiner, and D was a small private
company whose business was to buy and sell gold.
•
Unfortunately, JM employed a rogue, Gaffney, as a melter.
•
On more than 100 occasions, over a period of four or more years,
Gaffney stole small quantities of gold from JM and was not
detected by the company, despite its security measures and
inventory system (although there were departures from the
company’s security manual that allowed Gaffney access to the
melt room sooner than he was required to commence work, and
JM did not thoroughly search Gaffney as he left at the end of his
work day).
•
With the assistance of an accomplice, Knight (who passed himself
off as a gold prospector), and on more than 65 occasions, the
stolen gold (totaling over 48 kg) was sold to D (although, as
Knight’s heroin addiction worsened, D eventually became
somewhat suspicious as to the lawfulness of the source of the
gold).
•
At no time did JM ever notify any gold dealers (including D) that a
large amount of gold was unaccounted for and that it might be
Disposal by Mercantile Agents: s 24(2)(a)
• A “mercantile agent” is a commercial intermediary that
in the customary course of business has authority
either to sell goods, or to consign goods for the purpose
of sale, or to buy goods, or to raise money on the security
of goods: Factors Act 1892 (Qld), s 2.
Þ
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E.g., selling agents like brokers and auctioneers,
retail sellers and car dealers, antique dealers.
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• Note that the “mercantile agents” exception will not apply
where the agent has received possession of the goods
from a thief (or a person deriving title from a thief), as the
agent is not in such circumstances in possession of the
goods (or documents of title to the goods) “with the
consent of the owner”.
Factors Act 1892 (Qld):
3
(1)
(2)
(3)
(4)
Powers of mercantile agent with respect to disposition of
goods
When a mercantile agent is, with the consent of the owner, in
possession of goods or of the documents of title to goods, any
sale, pledge, or other disposition of the goods, made by the agent
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
the agent 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.
• Fraud on the part of the agent, however, will not destroy
the necessary consent.
Illustration from the case law:
When a mercantile agent has, with the consent of the owner,
been in possession of goods or of the documents of title to goods,
any sale, pledge, or other disposition, which would have been
valid if the consent had continued, shall be valid notwithstanding
the determination of the consent: Provided that the person taking
under the disposition has not at the time thereof notice that the
consent has been determined.
– Folkes v King [1923] 1 KB 282
When a mercantile agent has obtained possession of any
documents of title to goods by reason of being or having been,
with the consent of the owner, in possession of the goods
represented thereby, or of any other documents of title to the
goods, the agent’s possession of the first mentioned documents
shall, for the purposes of this Act, be deemed to be with the
consent of the owner.
For the purposes of this Act the consent of the owner shall be
presumed in the absence of evidence to the contrary.
•
Folkes delivered his car to a mercantile agent and authorized him to
sell it for not less than £575 without his (Folkes’) permission.
•
However, the agent secretly intended from the outset to sell Folkes’
car for whatever he could get for it, so that he could then use the
proceeds of sale to keep his own business afloat.
•
The agent sold Folkes’ car to Alvarez for £340, who purchased in
good faith and without notice of the agent’s fraud/lack of authority,
and the agent misappropriated the proceeds to his own use.
•
Alvarez then sold the car to Simons for £340, who sold it to Harris,
who in turn sold it to King for £500.
•
Folkes sued to recover the car or its value from King.
•
Held: Good title had passed to Alvarez by virtue of [s 3] of the
Factors Act; Alvarez could thus pass good title down the purchasing
chain to King; Folkes’ claim against King accordingly failed; Folkes
had consensually given the agent possession of his car for sale, and
the sale to Alvarez occurred in the ordinary course of the agent’s
business (Alvarez also being a purchaser in faith and without
notice).123
• Section 3 is a nineteenth-century exception to nemo dat,
the practical consequence of which is to provide a
statutory extension to the common-law estoppel
exception:
Þ
By leaving the goods (or title documents)
consensually in the agent’s possession, the owner
is effectively saying to the world that the agent
has authority to sell, at least in the ordinary
course of the agent’s business.
123
See also Lowther v Harris [1927] 1 KB 393; Oppenheimer v Attenborough & Son
[1908] 1 KB 221.
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Sale Under a Voidable Title:
Persons Having Special Power or Acting
under a Court Order: s 24(2)(b)
25 Sale under voidable title
When the seller of goods has a voidable title thereto, but the seller’s title
has not been avoided at the time of the sale, the buyer acquires a good
title to the goods, if the buyer buys them in good faith and without notice
of the seller’s defect of title.
• E.g., sheriffs and bailiffs Þ sales via such officials
possessing special powers of sale either under the
common law or under statute pass good title to a buyer
despite the absence of the owner’s express authority.
• I.e., you will recall from your Law of Contract II course that
one of the conventional rules about rescission of
contracts is that it will not be allowed if, in the meantime,
an innocent third party has acquired an interest in the
subject matter of the contract sought to be impugned.
• Also “agents of necessity” Þ e.g., at common law,
carriers in possession of perishable goods can sell the
goods if the owner cannot be contacted.124
• Sales (for example) under s 5 of the Disposal of
Uncollected Goods Act 1967 (Qld), or s 63 of the Secondhand Dealers and Pawnbrokers Act 2003 (Qld), or s 6 of
the Storage Liens Act 1973 (Qld).
• Where contact with the other party to the voidable contract
is not practicable (e.g., the rogue, by absconding, has
put the normal requirement of actual notification of
disaffirmance beyond the owner’s power), any outward
act by the seller revealing an intention to disavow the
contract with the rogue will suffice to rescind the contract
— e.g., recovering the goods,125 seeking the help of the
police in locating the goods.126
• Note, that where goods are stolen and the seller
manages to pass good title to an innocent purchaser by
virtue of one of the exceptions (because the goods have,
for example, been sold under a statutory power), the
original owner is deprived of ownership unless the thief
happens to be convicted, in which case property is
revested in the original owner by virtue of s 26 of the Sale
of Goods Act, notwithstanding any intermediate
dealings in the goods.
124
See, e.g., China Pacific SA v Food Corporation of India [1982] AC 939, 965
(Lord Simon): “One of the ways in which an agency of necessity can arise is
where A is in possession of goods the property of B, and an emergency arises
which places those goods in imminent jeopardy. If A cannot obtain instructions
from B as to how he should act in such circumstances, A is bound to take
without authority such action in relation to the goods as B, as a prudent owner,
would himself had taken in the circumstances.” In that case, the master of a ship
was entitled, in the case of accident and emergency, to enter into a contract that
bound the owners of the cargo, notwithstanding that it transcended his express
authority, provided it was made bona fide in the best interests of the owners
concerned. The same power is possessed by a land carrier in respect of
perishable goods: Sims v Midland Rly Co [1913] 1 KB 103, 112; Sachs v Miklos
[1948] 2 KB 23, 35.
Illustrations from the case law:
– Phillips v Brooks Ltd [1919] 2 KB 243
125
126
•
A con man, North, bought a £450 ring (among other items) from a
jeweller, Phillips, and paid by cheque.
•
In order to convince Phillips to accept the cheque, North identified
himself as “Sir George Bullough”, a well-known local identity, and
gave Phillips the address of that gentleman as proof of his identity.
•
Phillips looked up the address in a directory and satisfied himself that
he was indeed dealing with Sir George Bullough; he gave North the
ring but retained the other items pending clearance of the cheque.
E.g., Re Eastgate [1905] 1 KB 465.
E.g., Car and Universal Finance Co v Caldwell [1965] 1 QB 525 (below);
Newtons of Wembley Ltd v Williams [1965] 1 QB 560.
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•
When the cheque bounced and the fraud was discovered, Phillips
sought to rescind the contract so as to avoid North’s title; but before
he could do that, North had already gone out and pledged the ring to
a pawnbroker, Brooks Ltd, who bona fide and without notice
advanced £350 upon it.
•
Phillips sought to recover the ring from Brooks Ltd, but it was too late.
•
Held: Although the contract of sale, and therefore the title of North,
was voidable for fraudulent misrepresentation at the option of Phillips,
by the time he got around to avoiding the title, North had already
pledged it to an innocent third party for value without notice, Brooks
Ltd, who thus acquired good title to the ring.
– Lewis v Averay [1972] 1 QB 198
•
Lewis sold his car to a rogue pretending to be Richard Greene, a wellknown television actor; he accepted a cheque for £450 as payment.
•
Lewis asked the rogue for identification and was shown a studio pass
containing Richard Greene’s name and the rogue’s photograph.
•
The cheque was subsequently dishonoured, but meantime, within a
few days, the rogue, pretending to be Lewis, had sold the car to
Averay, who purchased it for £200 in good faith and without any
notice of the rogue’s fraud against Lewis.
•
The rogue disappeared and Lewis sought to recover the car or its
value from Averay.
•
Held: Lewis failed, as good title had passed to Averay; by virtue of his
fraud, the rogue’s acquired a “good but voidable” title to the car from
Lewis; but because Lewis hadn’t rescinded the contract before the
sale to Averay, Averay acquired good title.127
purchaser to communicate his election directly, he could nevertheless
evince his disaffirmatory intention by overt means short of
communication or repossession, which he did.
•
Seller or Buyer in Possession after Sale:
27
(1)
Seller or buyer in possession after sale
When a person, having sold goods, continues or is in possession of
the goods, or of the documents of title to the goods, the delivery or
transfer by that person, or by a mercantile agent acting for the
person, of the goods or documents of title under any sale, pledge, or
other disposition thereof to any person receiving the same in good
faith and without notice of the previous sale, has the same effect as
if the person making the delivery or transfer were expressly
authorised by the owner of the goods to make the same.
(2)
When a person having bought or agreed to buy goods obtains, with
the consent of the seller, possession of the goods or the documents
of title to the goods, the delivery or transfer by that person, or by a
mercantile agent acting for the person, of the goods or documents of
title under any sale, pledge, or other disposition thereof, to any
person receiving the same in good faith and without notice of any
lien or other right of the original seller in respect of the goods, has
the same effect as if the person making the delivery or transfer were
a mercantile agent in possession of the goods or documents of title
with the consent of the owner.
(3)
In this section —
mercantile agent has the same meaning as in the Factors Act.
Compare:
– Car and Universal Finance Co Ltd v Caldwell [1965] 1
QB 525
•
•
127
Similar facts to Phillips v Brooks Ltd and Lewis v Averay, above,
except that before Caldwell’s Jaguar car had fallen into the hands of a
bona fide purchaser for value without notice (a finance house), he had
already initiated steps to recover it, namely, by informing the police
and the Automobile Association immediately after the rogue’s cheque
was dishonoured.
This was held to be an effective election by Caldwell to rescind the
contract, as he had taken all possible steps to recover his goods in
the circumstances; although he could not locate the absconding rogue
See also Papas v Bianca Investments Pty Ltd (2002) 82 SASR 581.
The Court thus held that the contract with the rogue had been
promptly avoided, and the rogue’s “good but voidable” title thus
became void; the final (innocent) buyer in the purchasing chain thus
acquired no good title under the nemo dat principle, and Caldwell was
determined to be true owner of the car.
• (See also ss 9 and 10 of the Factors Act 1892 (Qld).)
• Section 27(1) — seller in possession:
Þ If B1 leaves goods (or the documents of title to
goods) in the physical possession of S, and,
before B1 takes delivery, S resells the goods to
B2, B1, who could have averted the second sale
simply by taking delivery/possession of the
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goods when she or he bought them, bears any
resulting loss.
• Note that s 27(1) and (2) both presuppose that the seller
or buyer (respectively) “in possession” is not the owner of
the goods at the time of the sale to the third party
(otherwise such a seller or buyer could pass good title to
the third party simply by virtue of their own title).
Þ B2 is protected so long as she or he buys the
goods in good faith and without notice of the
previous sale to B1, and has also taken delivery of
them, actually or constructively.128
Þ B1’s only remedy in this situation is to sue S in
conversion (which will be fruitless if S is insolvent).
• Note also that, for the purposes of s 27, the seller’s or
buyer’s (as the case may be) “possession” at the time of
sale to the third-party buyer must be actual physical
possession, but the required “delivery” to the third-party
buyer may be actual or constructive.
• Section 27(2) — buyer in possession:
Þ Where S (who is lawfully entitled to sell the
goods129) gives B actual physical possession of
the goods (or the documents of title to the goods)
before the sale is finalized, she or he is in the
same position as a buyer who leaves the goods
with the seller after sale, so that she or he
shoulders the risk if the buyer resells them to an
innocent third party — the latter can get good title.
Illustrations from the case law:
–
Þ The major difference between s 27(2) and s 27(1)
is that a buyer in possession can only give as good
a title as a mercantile agent could give.130
128
129
130
Michael Gerson (Leasing) Ltd v Wilkinson [2001] QB 514.
In Ford Credit Australia Ltd v Auto Trade Auction Pty Ltd [1982] VR 795, it was
held that the second buyer will only get good title to the goods under [s 27(2)] if
his or her seller — the buyer in possession of the goods — obtained that
possession from a seller who was him- or herself lawfully entitled to sell the
goods to the first buyer.
The phrase in s 27(2), “same effect as if the person making the delivery were a
mercantile agent”, is apt to confound, as it is not immediately clear what exactly
it is intended to denote or achieve (the buyer in possession not, for the purposes
of the exception, having actually to be a mercantile agent after all!). In England,
the words have been interpreted to mean that the buyer in possession must in
fact be acting like a mercantile agent (e.g., selling within business hours, from a
proper place of business, etc), thereby seriously restricting the third-party
purchaser’s protection under the exception — see Newtons of Wembley Ltd v
Williams [1908] 1 KB 221 (CA) (followed reluctantly in Forsyth International (UK)
Ltd v Silver Shipping Co Ltd (The Saetta) [1994] 1 WLR 1334, 1351), a decision
much criticized by commentators in the field. However, in New Zealand and
Australia (thankfully), a more liberal construction has been preferred — see
131
Pacific Motor Auctions Pty Ltd v Motor Credits (Hire
Finance) Ltd [1965] AC 867 (PC) — seller in
possession
•
A car dealer, Motordom, financed its stock-in-trade through a
“display agreement” (or “floor-plan arrangement”) with Motor
Credits, a finance house/hire-purchase company.131
•
Under the arrangement, the dealer bought cars and “resold” them
to Motor Credits for 90 per cent of the price that the dealer had paid
Langmead v Thyer Rubber Co Ltd [1947] SASR 29, 39 (Reed J); Jeffcott v
Andrew Motors Ltd [1960] NZLR 721, 729 (Gresson P); Gamer’s Motor Centre
(Newcastle) Pty Ltd v Natwest Wholesale Australia Pty Ltd (1987) 163 CLR 236,
242–3 (Mason CJ (obiter)), 252 (Brennan J (obiter)), 259 (Dawson J (obiter)). On
this view, all the words in s 27(2) do is to simply translate the deliverer’s
business hypothetically to that of a mercantile agent (i.e., they deem delivery or
transfer of the goods in the circumstances to be the legal equivalent of delivery
or transfer of goods by a mercantile agent when acting in the ordinary course of
business of such an agent). Even under that construction, though, it is difficult to
understand why such a deeming is necessary, as the words seem to add nothing
and the desired exception would be achieved if they were simply deleted
altogether (although, granted, courts cannot simply ignore the express words of
a statutory provision).
“Floor plan” or “display plan” financing is a common method of inventory
financing whereby the dealer sells on consignment for the supplier or financier of
the goods, either as the supplier’s or financier’s agent or under a contract for
“sale or return” or “on approval”. If the dealer sells as agent, then title will pass
from the supplier or financier to the buyer simply through the principles of agency
law.
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for them, but kept the cars on the shop floor with general authority
to resell them in its own name and to retain the proceeds of sale
subject to an obligation to account to Motor Credits.
•
When the dealer sold a car, it paid Motor Credits 90 per cent of the
price of the stock purchased plus interest (or without interest if the
customer purchased on hire purchase through Motor Credits). The
cars did not leave the dealer’s possession until delivery was taken
by the consumer buyers.
•
When the dealer ran into financial difficulties, Motor Credits
withdrew its authority to sell cars covered by the floor plan, but
before the cars could be repossessed the dealer sold 16 cars
covered by the plan to another car dealer, Pacific Motor Auctions,
who was a creditor of Motordom and had no notice of the
Motordom’s actual lack of authority to sell.
•
Pacific Motor Auctions paid for the cars by cheque, but the cheque
was then indorsed back to Pacific Motor Auctions in settlement of
the debt owed to it by Motordom.
•
An issue thus arose as to which company had title to the disputed
cars. Motor Credits sued for return of the cars, as well as for
damages for detention.
•
Held: Pacific Motor Auctions acquired good title; the dealer, as
“seller” of the cars to Motor Credits, had continued “in possession”
of them after sale (meaning there was a continuity of physical
possession regardless of any private arrangements between the
seller and original buyer), and Pacific Motor Auctions had bought
them in good faith and without notice of the previous sales to Motor
Credits under the floor plan; Motor Credits only remedy was to sue
the (insolvent) dealer in conversion.
•
The issue for the Court was whether Natwest, which claimed to be
an innocent third party, had taken delivery of the cars as required
by s 27(2), as the cars had never been physically handed over to
them; if the cars had not been “delivered by” the buyer in
possession to the sub-buyer, the finance company could not take
advantage of the buyer-in-possession exception to the nemo dat
rule contained in that provision.
•
Held (by majority): The cars had been constructively delivered to
Natwest and that constructive delivery sufficed to satisfy the
requirements of delivery to the sub-buyer under s 27(2).
“[T]o treat ‘delivery’ as embracing constructive delivery is to enhance
the protection given by [s 27(2)] to the innocent purchaser. There is
no valid reason why his title should depend upon actual, as distinct
from constructive, delivery. The mischief aimed at is a sale by a
buyer in possession of goods or documents of title who is not the
owner of them, the object being to protect the sub-buyer who is
deceived by the appearance of ownership arising from possession.
There is no point in confining the protection to the sub-buyer who
takes under an actual delivery.”
Mason CJ (p 249)
* * * * * * *
– Gamer’s Motor Centre (Newcastle) Pty Ltd v Natwest
Wholesale Australia Pty Ltd (1987) 163 CLR 236 —
buyer in possession
•
A vehicle wholesaler (Gamer’s) gave a dealer possession of a
number of cars on the understanding that they would be paid for
within seven days.
•
Within the seven-day period the dealer had resold the cars to a
finance company (Natwest) under a “Used Vehicle Bailment
Agreement (Dealers Stock)”, who paid the dealer 90 per cent of the
purchase price and allowed the dealer to hold onto the cars as
display stock (i.e., a floor-plan arrangement for financing cars
already in the dealer’s possession under the agreement to sell with
Gamer’s).
•
Gamer’s, having not been paid within the seven days, then seized
the vehicles in the dealer’s possession, and Natwest sued them in
detinue and conversion.
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assets as a source of payment if the debtor defaults on
its personal obligations, thereby reducing the risk of
lending (i.e., by making it more likely that any personal
obligation will be met and, if it’s not, then ensuring priority
in the debtor’s bankruptcy or insolvency by making the
secured property unavailable to other creditors).
SECURITY INTERESTS IN
PERSONAL PROPERTY
Introductory
• There are two basic types of security interest over
personal property:
• When credit is provided by one legal person to another,
the credit-provider will often require security to protect its
interests.
• The purpose of security is to ensure that obligations
are enforceable against the general or specific assets of
the obligor/debtor (whether land or personalty), otherwise
the creditor will only have a personal right of action
against the defaulting debtor for recovery of any amounts
owing and not a proprietary remedy.
• Here we are (rather briefly) considering rights over
personal property,132 the purpose of which is to ensure
the performance of a personal obligation by the owner
(typically133) of that personal property.
• So, “security rights” over personal property are
limited134 property rights that make available to a
lender/creditor one or more of the borrower’s/debtor’s
132
133
134
As seen in the first half of the course, the primary form of security interest over
land is the mortgage — a statutory charge by virtue of s 74 of the Land Title Act
1994 (Qld).
Let’s not complicate matters right off the bat. It was certainly possible in some
situations for non-owners to create security interests over personal property
(e.g., a pledgee under a sub-pledge), but this issue more squarely arises when
we come to consider the PPSA, where the concept of “security interest” under s
12(1) of the Act is not premised on ownership at all — of which more later.
Limited because, in contrast to full beneficial ownership, the secured party’s
property rights are measured by the value of the personal obligation secured and
destroyed by the due performance of that obligation.
Þ POSSESSION-BASED security interests
and
Þ NON-POSSESSORY security interests.
• With possessory security interests, the grantor transfers
possession but not title (ownership); hence, any right of
sale of the secured asset will derive from the terms of the
underlying agreement creating the arrangement /
relationship and not from the fact that the creditor
acquires title to the debtor’s property.
• With non-possessory security interests, the debtor
retains possession but grants the creditor either title
(e.g., a chattel mortgage) or some lesser proprietary
interest (e.g., a charge, fixed or floating) on the
understanding that, should the debtor default, the creditor
may seize or otherwise take control of the relevant asset
and realize its value, helping him- or herself to the
proceeds to recover the debtor’s outstanding liabilities
owed to the creditor.
Þ
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Note that, common-law chattel mortgages aside, as the
creditor here does not have possession of the security, it
is classified as an EQUITABLE SECURITY right/interest
(i.e., it is recognized only in equity and not at common
law).
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• As we proceed, it will likely be noticed that if there is a
unifying theme here, it is that the law favours the sure
bet: either the lender/creditor in possession or control
of the relevant asset and/or registration of the security
interest in the relevant asset.
• Although the main law now governing secured
transactions in Australia is the Personal Property
Securities Act 2009 (Cth) (“PPSA”), we shall begin with a
brief discussion of general-law concepts relating to
security rights over personal property, which will provide
useful background and context for appreciating the
significance of the reforms that have been introduced into
Australia by the PPSA.
• Consider the following overview of types of security
interest:
Classification
Type
Sub-type
How Arising
Source
Legal
Possessory Security Interests: Pledges
and Common-Law Liens
Law
Mortgage
Nonpossessory
Statutory
Equitable
Pledges
• The pledge (or pawn135) is one of the oldest and most
basic forms of chattel security.
By agreement
Equity
Fixed
Charge
• It is a transaction under which tangible personal
property136 is delivered, actually or constructively, by
a debtor (“the pledgor”) to his or her creditor (“the
Floating
Pledge
135
Law
Contractual
Possessory
Lien
Common Law
Equitable
*
*
By operation
of law
Equity
As we shall see, equitable liens are not really “possession-based” at all, but
rather operate like a “hypothecation” or “charge” over the property subject to the
lien.
136
No substantive distinction exists between “pledge” and “pawn” — the terms are
interchangeable (although “pawn” is usually used in relation to a pledge in favour
of a “professional pledgee”, i.e., a “pawnbroker” or “dealer” in pledges). All the
Australian jurisdictions have legislation that regulates pawnbrokers. In
Queensland, this is the Second-hand Dealers and Pawnbrokers Act 2003 (Qld).
Pawnbrokers are required to be licensed. They must also display their name,
keep a record of all pawns made, and provide a duplicate copy of the record to
the pawnor. The Act also protects the pawnor’s right to redeem the pawn, as well
as stipulating the conditions under which goods the subject of unredeemed
pawns may be sold. Pawnbroking is not covered by the National Credit Code
(see National Consumer Credit Protection Act 2009 (Cth), s 6(9)). It simply
continues to be regulated by the various State and Territory pawnbroking
statutes. Note, too, that a security interest taken by a licensed pawnbroker is
outside the scope of the PPSA provided the value of the pledged property is, at
the time of possession being taken, less than or equal to $5,000: PPSA, s
8(1)(ja) and (6).
E.g., goods or documents.
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pledgee”), to be retained as security for the due
discharge of the debt,137 coupled with an express or
implied138 right of sale if the pledgor defaults.
=
a bailment of personal property as security
for a debt.139
• It can be considered a security of “intermediate
strength” between a lien and a mortgage.140
• Generally, a common-law lien is a (passive) right
available to a person in possession of goods (“the
lienee”) belonging to another (“the lienor” — who must
be the owner of the goods, or someone with the
owner’s authority, actual or implied or apparent) under
a contract for the provision of services relating to
them, entitling the lienee to retain possession until
she or he is paid for those services.
• Bank retains a bill of lading on the making a loan;
• Pawnbroker retains goods in return for a sum of
money advanced.141
139
140
141
Second-hand Dealers and Pawnbrokers Act
2003 (Qld), ss 60–63.
Common-Law Liens
• Pledges can arise in different settings, e.g.:
138
–
Þ This has obviously now changed,142 as a pledge
falls within the functional definition of “security
interest” in s 12(1) of the PPSA — of which more
below.
Þ Notice that this right to redeem the property is a
common-law right and not merely an “equity
of redemption” as such. Unlike the mortgagee,
the pledgee has no right to “foreclose” (title
having not passed, of course).
Although the language of “debt” is used here, this is simply for convenience and
ease of reference. Pledges can secure either monetary or non-monetary
obligations, both present and future.
The power of sale is actually inherent in a pledge; hence, it need not be
expressly created by the security agreement. See, e.g., Askrigg v Student Guild
of Curtin University of Technology (1989) 18 NSWLR 738.
See the High Court’s extended discussion of pledges (and liens and chattel
mortgages) in Palgo Holdings Pty Ltd v Gowans (2005) 221 CLR 249.
Halliday v Holgate (1868) LR 3 Ex 299.
It’s probably fair to observe that, outside the pawnbroking context, the pledging
of goods is much less common than it used to be. Documentary pledges, though
— pledges of negotiable instruments, corporate securities or documents of title,
for example — certainly continue to play an important role in the context of shortterm financing.
After a stipulated time (usually three months
unless longer is agreed), if the goods are not
redeemed, title to the goods vests in the
pawnbroker.
• Pre-PPSA, pledges were not required to be registered
under the Corporations Act 2001 (Cth) or as a bill of
sale or under the motor vehicle securities legislation (if
the pledge was given over a motor vehicle).
• Under a pledge, the goods remain the property of the
pledgor, whom, upon repayment of the loan, is entitled
to immediate possession of the goods again.
137
–
• However, a lien can arise in other situations as well
(i.e., not relating to the provision of services
regarding the goods), e.g.:
• Innkeeper’s lien (over guests’ belongings,
including luggage)
142
Although, as we shall see, as possessory securities, pledges can be perfected
by possession and so still are not dependent on registration as such.
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• Sale of Goods Act 1896 (Qld), s 42 (gives the
unpaid seller a lien over goods sold).
operation of law — although they may arise by
agreement.143
Þ Liens will certainly not arise where
inconsistent with the intention of the parties
(e.g., as disclosed by a course of dealing
between them — recall Wilson v Lombank Ltd
(earlier)).
• Liens are thus somewhat variform in their contexts
and applications, and not all are “possessory” (or
“common-law”) in nature. They can be classified as
follows:
Liens
Possessory
General
By agreement
Particular
c. Both give the creditor a LEGAL interest in the goods
(i.e., based on possession (“special property”)).
Non-possessory
Equitable
Maritime
d. Both the lienee (creditor) and pledgee (lender) are
BAILEES — i.e., they are in possession of goods
belonging to another.
Statutory
Þ
Repairers/Improvers
Innkeepers and carriers
By custom or trade usage
• Some General Comments on Pledges and CommonLaw Liens:
e. Both give the creditor security for the debt/obligation.
a. A pledge is a consensual security transaction —
i.e., the owner gives (or allows) possession of goods
for the express purpose of securing the relevant
obligation. A possessory lien, however, is a
(unilaterally imposed) RIGHT enjoyed by the lienee
— i.e., security is collateral to the main purpose;
possession is acquired for some other purpose than
securing an obligation (e.g., for repairing the goods).
b. Relatedly, in contrast to pledges, liens usually arise
without any agreement creating them — i.e., by
As with other bailees, therefore, both the
pledgee and the lienee have a duty to take
reasonable care of the goods (to the standard
expected of a bailee for reward), as well as to
restore the goods in specie after the pledgor /
lienor discharges the secured obligation.144
f.
Power of sale:
• In recognition of the consensual nature of the
pledge, there is an implied (indeed inherent)
power to sell pledged goods if the pledgor
defaults, and an express power in some
circumstances (e.g., Second-hand Dealers and
Pawnbrokers Act 2003 (Qld), s 62).
143
144
For this reason, as we shall see, liens arising by operation of law remain
untouched by the PPSA regime: PPSA, s 8(1)(c).
It also follows that both the pledgor and lienor enjoys rights to sue a third party
who wrongfully interferes with his or her possession of the goods (but he or she
must, of course, hold any damages recovered in excess of his or her personal
losses on a constructive trust for the pledgor/lienor).
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g. Possession:
Þ Pledges are enforced by exercise of the
power of sale.
• Generally, the creditor must have rightful146 and
continuous / uninterrupted POSSESSION of the
goods to maintain a pledge or a lien over them.
Þ The proceeds of sale may be used to satisfy
the outstanding obligation (including the costs
of sale), with any excess being refundable to
the pledgor.
• So, security is LOST — the pledge or lien is
extinguished — if the goods are returned to the
debtor/owner (even by mistake147),148 UNLESS
they are returned on the clear basis that they are
held by the debtor on a temporary basis, as
BAILEE only for the creditor.149
• With liens, no power of sale exists, unless it is:
• contained in the parties’ agreement;
• allowed by custom; or
• authorized by statute (e.g., Storage Liens Act
1973 (Qld), s 6; Air Services Act 1995 (Cth), s
59; Disposal of Uncollected Goods Act 1967
(Qld), ss 10, 11 — although an application for
an order to sell must first be made to the
Magistrates Court).
Example:
A owns a helicopter that is repaired by a mechanic, B, who
has a lien over the helicopter for the unpaid bill. A has the
opportunity to earn money on a lucrative charter contract for a
week and may then be in a position to pay B for his work. B
agrees to surrender possession of the helicopter on the
understanding that it will be returned at the end of the week
and without prejudice to B’s lien. B’s lien is preserved
despite the surrender of possession to A.
Þ I.e., in contrast to pledges, because liens
are typically non-consensual, the lienee
generally has only a right to retain the
goods (in addition to his or her personal
right to recover the debt by court action),
and no implied right to sell or otherwise
deal with the property.
Þ Statutory or contractual rights of sale
are therefore necessary to realize the
security function of a possessory lien.145
• It also follows that a common-law lien can only
exist over personal property that is capable of
being possessed.150
146
147
148
149
150
145
See, generally, J Peden, “Lienee’s Statutory Power of Sale” (1968) 6 University
of Queensland Law Journal 24. Note, too, that without statutory or contractual
intervention, a lien does not entitle the lienee to make a charge for storage even
if she or he has incurred expense in keeping the chattel.
In Madden v Kempster (1807) 170 ER 859, for example, possession obtained by
a misrepresentation was held not to give rise to a valid lien.
Dicas v Stockley (1836) 7 C & P 587; 173 ER 258.
Hatton v Car Maintenance Co Ltd [1915] 1 Ch 621; Leeward Holdings Ltd v
Douglas [1982] 2 NZLR 532.
Great Eastern Railway v Lord’s Trustee [1909] AC 109 (HL); Albemarle Supply
Co v Hinde [1928] 1 KB 307; Rose v CMS Operations Ltd [2002] EWHC 59 (Ch).
Accordingly, in Your Response Ltd v Datateam Business Media Ltd [2015] 1 QB
41 (CA), a database manager refused to release a computer database
(subscription lists for its customer’s magazines) or give its customer access to it
until all outstanding fees were paid — i.e., he was asserting a common-law lien
over it — but the Court held that a common-law lien was not available over a
database retained by the data company, as it was not property susceptible of
possession that was capable of being subject to larceny or conversion or being
taken in an execution.
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liens with caution (if not outright
suspicion).153
• Some Specific Comments on Liens:
• Note that a lien may be particular or general.
• As earlier signaled, liens arise in different ways:
• A particular lien can only be exercised over
SPECIFIC goods in the lienee’s possession in
respect of which the payment is due. Such a lien
is not transferrable to other goods.151
• A general lien can be exercised over ANY
goods in the lienee’s possession for PAST
services as well as present, even though the
lienee may have been paid for services in
respect of the goods CURRENTLY in his or her
possession — i.e., it secures more indebtedness
than a particular lien does.
Þ
Þ
151
152
Those historically recognized at common law
(below);
Þ
In specific situations, by statute (e.g., unpaid
seller’s lien under s 42 of the Sales of Goods
Act 1896 (Qld); storer’s lien under Storage Liens
Act 1973 (Qld), s 6);
Þ
By contract, either expressly or impliedly;
Þ
By custom or trade practice.
• E.g.: Woodworth v Conroy [1976] QB 884
(an accountant has at least a particular
lien on books of account upon which he or
she has exercised skill and attention)
A general lien arises either by agreement
of the parties or by reason of (certain,
reasonable, long-standing and notorious)
custom or trade usage (e.g., bankers’
and solicitors’ liens over such documents
as share certificates, certificates of title
and bills of exchange that have been left
with them in connection with some dealing
(and not merely for safekeeping)).152
Common-Law Liens
• The common law traditionally recognized two classes
of particular possessory lien existing independently of
contract, trade usage or custom:
1. Liens of persons who by virtue of their quasipublic vocation owe a common-law duty towards
the public at large (innkeepers and common
carriers); and
Because they operate to the detriment of
the unsecured creditors of the lienor,
courts have tended to approach general
See, e.g., Dinmore Meatworks Pty Ltd v Kerr (1962) 108 CLR 628 (slaughterer
unsuccessful in attempting to claim a possessory lien over certain processed
meat as security, not only for charges for slaughtering and preparing for sale that
particular meat, but also for all other charges owing to the slaughterer by the
same owner).
General liens have also been held to exist in favour of stockbrokers, mercantile
agents and insurance brokers.
Þ
2. Liens of persons who, in their business and at the
request of the lienor (or his or her agent), improve
(i.e., “add value” to) the goods of the lienor by
applying to those goods their skill and labour
153
See generally Protean Enterprises (Newmarket) Pty Ltd v Randall [1975] VR
327; Majeau Carrying Co Pty Ltd v Coastal Rutile Ltd (1973) 129 CLR 48.
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(variously called the “repairer’s”, “improver’s”,
“artificer’s”, “artisan’s” lien).
• Innkeeper’s Lien
16.
Meaning of innkeeper’s liability and innkeeper’s
lien
…
(3) For this Act, an innkeeper’s lien is the common
law right allowing an innkeeper —
(a) to take possession of the property of the
innkeeper’s guests154 that is brought to the
innkeeper’s inn; and
(b) to keep the property until the innkeeper
receives payment for accommodation, beverages,
food and other services provided to the guest.
Held: The lien was valid.
• A common carrier enjoys a particular possessory
lien over goods carried (cargo) until all carriage
and storage fees for that carriage are paid.
Innkeeper’s lien
(1) This section applies if a person is a guest of an
accommodation provider and the guest’s actions
would, if the accommodation provider were an
innkeeper at common law, give rise to an
innkeeper’s lien for the guest’s property.
(2) The accommodation provider may exercise an
innkeeper’s lien for the guest’s property.”
Þ This is because common carriers, like
innkeepers, are generally not in a
position to deny service to anyone, and
accordingly they are given certain
compensatory rights, e.g., a lien over
cargo carried, in order to offset the
vulnerability that comes with having to
accept the public at large.
– Threfall v Borwick (1874–75) LR 10 QB 210
154
•
• Common Carrier’s Lien (and Sea Carrier’s Lien)
Illustration from the case law:
•
He left owing £45 to the hotelier who claimed an
innkeeper’s lien on the piano.
“It is admitted that in general an innkeeper has a lien on all
goods which the guest brings with him as his own, whether
they are his own or another’s; and the only question raised
is, whether the lien extends to goods which the innkeeper
would not have been bound to receive. I may say that I
should be inclined to agree, if a guest brought a piano with
him for his own amusement, that, according to the
advanced usages of society, the innkeeper might be well
held to be bound to receive it, if he has room for it. But it is
quite unnecessary to decide that question, because we are
all clearly of opinion that, the defendant having taken in the
piano and safely kept it, it is too clear to be doubted that he
has a lien upon it.”
Lord Coleridge CJ
• The common-law rights of an innkeeper
(“accommodation provider”) are now contained in
the Traveller Accommodation Providers (Liability)
Act 2001 (Qld), ss 8 and 16:
8.
•
• “A common carrier is one who holds himself out as
being prepared to carry for reward the goods of
any person who wishes to employ his services.”155
A hotel guest brought his wife, sister, and a piano
belonging to the plaintiff (a rather unhappy
combination?).
At common law, “guests” must be distinguished from “lodgers” or “boarders”.
Guests arrive at an inn in the course of their journey requesting food or
accommodation; lodgers, in contrast, have previously arranged or contracted to
be received at the inn. See Daniel v Hotel Pacific Pty Ltd [1953] VLR 447. The
innkeeper’s lien applies to guests’ goods but not lodgers’. The latter would have
to be a contractual rather than a common-law lien.
155
N Palmer, Bailment (2nd ed, 1991) 969. Note that he or she must carry goods.
A carrier of passengers only is not a common carrier.
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• The main test is whether the carrier156 “makes
known” that he or she reserves the right to
refuse engagements.
“The holding out or profession of the character of common
carrier may be expressed, or it may be, and usually is, implied
by a course of business or other conduct. It is in every case a
question of fact whether the character of a common carrier
has been assumed. In considering that question an important
matter is whether the carrier holds himself out as ready
without discrimination to carry the goods of all persons who
may choose to employ him or send him goods to be carried.
If, instead of inviting all persons without discrimination to use
his ships or vehicles, he reserves the right of choosing among
them, independently of the suitability of their goods for his
means of transportation and without regard to the room or
space he has available, then he is not a common carrier.”157
•
Here, note the critical dates:
– P contracted to collect two consignments. It had
collected the first, but not the second, when a
receiver was appointed against D, which caused
the floating charge to crystallize against D’s
assets.
– At that time, P did not have possession of the
second consignment. So chronologically:
1. Contract between P and D.
2. Debenture crystallizes against D’s property.
3. P takes possession of the second
consignment, being D’s property, and asserts
a lien for D’s outstanding indebtedness (again,
only possible because P had a general lien as
opposed to a particular lien).
•
D’s receiver argued that the debenture had priority over
P’s lien.
•
Held: The carrier (P) was carrying out a pre-existing
contract at the time of D’s winding up and P was
entitled to complete its contract and thereby perfect its
lien over the goods; when the debenture-holder’s rights
crystallized, they were subject to D’s pre-existing
contractual obligations.
•
Note that this case does not alter the principle that a lien
only comes into effect when the lienee takes
possession of the goods, but rather confirms that if the
right to assert a lien derives from a prior contract, the
lienee is entitled to invoke its terms if and when it
subsequently comes into possession of the goods.
• Private carriers can only confer the right to lien
by consent (i.e., under the contract of carriage).
Illustration from the case law:
–
156
157
158
George Barker (Transport) Ltd v Eynon
[1974] 1 WLR 462
•
D was a meat-importing company whose loans were
secured by a floating-charge debenture.
•
P was a transport company.158
•
P had a general lien (created by contract), which made
sense in the context of the dealings between the parties
(since they did regular business, and so a general lien
enabled P to release D’s goods for which P had not
been paid on the basis that it could later assert a lien
against other goods if it was not paid: which was the
case here, as there was an outstanding indebtedness of
£3,300).
• A sea carrier is not a common carrier. Its right to
a lien derives from maritime law (below) and is
based on commercial convenience.
• Repairer’s / Improver’s Lien
Occasionally statute will declare a carrier, who would otherwise generally be
considered a common carrier, not to be such. See, e.g., Transport Infrastructure
Act 1994 (Qld), s 248 (“A rail government entity is not a common carrier”).
James v Commonwealth of Australia (1939) 62 CLR 339, 368 per Dixon J.
P was probably not a common carrier, but the conditions of carriage stipulated
that the bailee could exercise a lien. So, a lien arose by virtue of contract.
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• Where goods are entrusted to a person to do
work on or in connection with them, that person
will enjoy a lien for charges for the work done,
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– seamen for their wages;
– salvors (on the property saved) for the
salvor’s expenses;
– the master of the ship for wages and
disbursements properly paid to him;
– the holder of a bottomry bond; and
– claims (e.g., the owners of another ship) with
respect to damage caused by a collision
involving the ship.
provided that the work improves the goods
(“mere maintenance”159 is insufficient).
Þ E.g., motor vehicle mechanics, tailors, dry
cleaners, repairers, dyers …
• Such a lien may be negated in the circumstances
of the case (e.g., Wilson v Lombank Ltd
(earlier)).160
• Improver’s liens only arise upon completion of
the agreed/requested work, as only completion of
the work makes it possible for the lienor to
extinguish the lien by paying whatever amount is
property due to the lienee.161
Non-Possessory Security Interests: Chattel
Mortgages, Charges and Equitable Liens
Common-Law (Chattel) Mortgages:
• Maritime Liens
• Like land, personal property can be mortgaged,
although a legal mortgage over chattels (like the
mortgage over old-system land before Torrens) is a
transfer-based (rather than a possessory162) form of
transaction / security interest in relation to personal
property.
• These are different from a possessory lien in
that they are exercised by the issue of
proceedings against the property itself, i.e., the
arresting of the ship by means of a claim in a court
exercising admiralty jurisdiction (not common
law).
• The lien attaches to the ship notwithstanding its
sale or transfer.
Þ
I.e., it involves the outright transfer by the
debtor/owner/mortgagor to the
creditor/mortgagee of legal title to personal
property, subject to a covenant that the
creditor/mortgagee will transfer the property
back once the mortgage debt is paid (i.e., a
form of conditional assignment).
Þ
While the mortgage is current, the creditor
holds legal title while the debtor simply has a
• A maritime lien may arise in favour of:
159
160
161
E.g., stabling and watering a horse or preventing a chattel from deteriorating.
This is perhaps a rather illogical and anachronistic distinction.
See Teppenden v Artus [1964] 2 QB 185; Fisher v Automotive Finance Co of
Australia Ltd (1928) 41 CLR 167; Majeau Carrying Co Pty Ltd v Coastal Rutile
Ltd (1973) 129 CLR 48, 54 (Stephen J).
Bolwell Fibreglass Pty Ltd v Foley [1984] VR 97. If for some reason the lienor is
entitled in the particular circumstances to recover possession of the goods
although the worker has not completed the work that she or he was engaged to
do, the worker has a lien for a reasonable price for the work actually done (or, if
the contract fixes a price for the work actually done, for that price) (ibid).
162
I.e., possession may well pass, but it need not. Possession is not essential or
create or support the mortgagee’s legal title.
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(specifically enforceable) equity of
redemption.
the mortgaged goods upon default by mortgagor
under the mortgage.
• The creditor/mortgagee’s remedy upon default is
either foreclosure (a court order extinguishing the
equity of redemption and allowing retention of the
property in satisfaction of the debt), or exercise of the
power of sale (simply as one of the legal incidents
of ownership that passed to creditor/mortgagee
under the mortgage).
• An equitable mortgage will arise where there is a
contract to give a legal mortgage, or there is a legal
mortgage of future property (the equitable interest
passing to the mortgagee as soon as the mortgagor
acquires the asset), or there is a transfer to the
creditor of equitable title or an equitable interest only
(e.g., a beneficiary’s interest in trust property, or the
mortgagor’s equity of redemption in property that is
the subject of a prior legal mortgage to someone else).
• Note, too, that chattel mortgages given to secure
credit given by credit-providers might also be caught
by consumer-credit laws, most notably Part 5 of the
National Credit Code (NCC), which deals with both
land and chattel mortgages. (The NCC continues to
operate in tandem with the PPSA.)
Charges:
• A charge gives the charge-holder (“the chargee”) the
right to have the property of another (“the chargor”)
used to satisfy a money (or some other) obligation.
Þ
This gives the right to SELL the property (the
security) and to recover the debt from the
proceeds.
• In contrast to the chattel mortgage (above), no legal
title is transferred to the creditor — just a right in
equity to force a sale of the collateral if the debtor
defaults and to apply the proceeds in full or partial
satisfaction of the debt; it is an equitable “shadow” or
encumbrance on the debtor’s legal title.
• Before the PPSA (below), in order to be effective
against third parties (e.g., purchasers from the
mortgagor, the trustee in bankruptcy or insolvency
administrator), a chattel mortgage would have to have
been registered as a (conditional) bill of sale under
the Bills of Sale and Other Instruments Act 1955
(Qld)163 — now superseded by the PPSA. Again, this
legislation was enacted to overcome the mischief of
third parties being misled by the mortgagor’s physical
possession of the mortgaged goods. The Act
(Schedule 5) also implied various covenants into
chattel mortgages, including the right to seize and sell
• The right of sale, notice, is not merely a personal right
but an equitable proprietary interest in the charged
property (by virtue of equity’s preparedness to see
done what ought to be done and to compel recourse
to the asset for the purpose of forcing its sale).
• A chargee unable164 to take possession (peaceably)
must apply to the court for an order for sale or the
163
If the chattel mortgage was taken over a motor vehicle or boat, there was
separate chattels security legislation to deal with that: Motor Vehicles and Boats
Securities Act 1986 (Qld).
164
Bear in mind that, unlike the mortgagee under a chattel mortgage, the chargee
has no automatic right to take possession of the hypothecated goods (given
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appointment of a receiver (unless the chargee’s
powers are conferred by contract, which may avoid
the need for court application).
Illustration from the case law:
• Pre-PPSA, charges could be fixed (specific) or
floating:
– Illingworth v Houldsworth [1904] AC 355
Fixed charge:
Þ
Specific property is specified as
subject to the debt and the chargor
(owner of the property) has no right to
deal with that property inconsistent
with the encumbrance.
Floating charge:
Þ
crystallizes and attaches to the
chargor’s assets at that time — i.e., it
converts into a fixed charge.
Secures a non-specific interest over
a pool of assets of the debtor —
typically the total assets of a company
or generic categories of assets such
as inventory or accounts receivable
(i.e., “circulating assets”).
Þ
The chargor (debtor/owner) can deal
with the property (including selling it
in the ordinary course of business)
without the consent of the chargee /
creditor UNTIL a specified event
occurs (e.g., notice, appointment of a
receiver, act of bankruptcy, etc. — a
“triggering event”).
Þ
At that stage, the charge no longer
“floats” (or lies “dormant”) but rather
there is no conveyance); such a right must therefore be contractual (or otherwise
authorized by law).
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•
A company, by way of security to guarantors, assigned
by deed all of its present and future book and other
debts, with the benefit of all securities for the same, to a
trustee in trust for the guarantors.
•
The deed contained no express provision against
possession being taken by the trustee, but declared that
the trustee should at any time, if required by the
guarantors, give notice of this assignment to the
company’s debtors, but that it should not be incumbent
on the trustee to give notice unless he thought fit, with
provisions that the trustee might at any time give notice,
appoint a receiver and exercise the statutory power of
sale, but meanwhile should not be answerable for
allowing the company to receive the book debts.
“My Lords, it does not appear to me that this case is
susceptible of much discussion, nor do I think it
necessary to give an abstract definition of what a floating
security is; it is enough to say that this instrument is one,
and I think it is one for many reasons. In the first place
you have that which in a sense I suppose must be an
element in the definition of a floating security, that it is
something which is to float, not to be put into immediate
operation, but such that the company is to be allowed to
carry on its business. It contemplates not only that it
should carry with it the book debts which were then
existing, but it contemplates also the possibility of those
book debts being extinguished by payment to the
company, and that other book debts should come in and
take the place of those that had disappeared. That, my
Lords, seems to me to be an essential characteristic of
what is properly called a floating security. The recitals, I
agree with Cozens-Hardy LJ, are not without their
importance. They shew an intention on the part of both
parties that the business of the company shall continue to
be carried on in the ordinary way — that the book debts
shall be at the command of, and for the purpose of being
used by, the company. Of course, if there was an
absolute assignment of them which fixed the property in
them, the company would have no right to touch them at
all. The minute after the execution of such an assignment
they would have no more interest in them, and would not
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be allowed to touch them, whereas as a matter of fact it
seems to me that the whole purport of this instrument is
to enable the company to carry on its business in the
ordinary way, to receive the book debts that were due to
them, to incur new debts, and to carry on their business
exactly as if this deed had not been executed at all. That
is what we mean by a floating security.”
Earl of Halsbury LC (pp 357–8)
secure repayment of the money paid (i.e., if the
contract goes off without the purchaser’s default).165
• It is possible that, in relation to personal property (in
contrast to land), equitable liens will be narrowly
construed,166 although there is perhaps less evidence
of this in Australia.167
“I should have thought there was not much difficulty in
defining what a floating charge is in contrast to what is
called a specific charge. A specific charge, I think, is one
that without more fastens on ascertained and definite
property or property capable of being ascertained and
defined; a floating charge, on the other hand, is
ambulatory and shifting in its nature, hovering over and
so to speak floating with the property which it is intended
to affect until some event occurs or some act is done
which causes it to settle and fasten on the subject of the
charge within its reach and grasp.”
Lord Macnaghten (p 358)
• An equitable lien is binding on all persons who acquire
the liened property with notice of the lien.
• Equitable liens are enforced by obtaining a court
order that the property be sold and the proceeds
applied to satisfy the amount of the lienee’s debt:
Hewett v Court (1983) 149 CLR 639 (hence their
similarity to a charge).
Equitable Liens:
• An equitable lien is a right conferred by law upon one
person to have the real or personal property of
another applied to discharge a debt (e.g., to secure
amounts paid under contract).
• It is a form of charge that arises by operation of law
(i.e., not conferred consensually by the
borrower/debtor, as in the case of a regular charge).
165
• In contrast to a common-law (i.e., possessory) lien, an
equitable lien does not depend on possession.
166
• A common example is the purchaser’s lien — i.e.,
the vendor in possession is paid a deposit or the
purchase price (or part of it) before title is transferred;
the purchaser has a lien over the property in equity to
167
See, e.g., Byland Nominees Pty Ltd (in liq) v MacLean [1985] WAR 352; I
Hardingham, “Equitable Liens for the Recovery of Purchase Money” (1985) 15
Melbourne University Law Review 65. Note that the vendor’s lien — whereby
an unpaid vendor has an equitable lien over the land for the purchase price,
notwithstanding that the purchaser has gone into occupation of the property —
has, in relation to Torrens-title land, been abolished in Queensland by s 191 of
the Land Title Act 1994 (Qld): “A vendor of a lot does not have an equitable lien
on the lot because of the purchaser’s failure to pay all or part of the purchase
price for the lot.”
Re Wait [1927] 1 Ch 606 (Sargant LJ dissenting). Recall that 500 tons of wheat
was purchased from a larger bulk of 1,000 tons but not set aside and thus not
ascertained; as an equitable lien works like a fixed (not floating) charge, it follows
that only ascertainable property is contemplated. See, generally, S Worthington,
“Equitable Liens in Commercial Transactions” (1994) 55 Cambridge Law Journal
263.
Australian courts appear more receptive to equitable proprietary ideas in
personal property law: Hewett v Court (1983) 149 CLR 639; J Phillips, “Equitable
Liens — a Search for a Unifying Principle” in N Palmer and E McKenrick (eds),
Interests in Goods (2nd ed, 1998) 975.
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Personal Property Securities Act (Overview Only)
Statutory Controls (Pre-PPSA)
• Because we are discussing NON-possessory
securities, third parties (i.e., strangers to the
security arrangement between the debtor and the
creditor) are at risk because the debtor/borrower is in
possession of the property and may sell it, or offer it
as security for another loan, without disclosing the
fact it is already security for a prior indebtedness.
Introductory
• The Personal Property Securities Act 2009 (Cth)
(“PPSA”) derives from, and is closely modelled on, the
Canadian (especially Saskatchewan) and New Zealand
generic regimes, which are themselves modelled on
Article 9 of the US Uniform Commercial Code.
• Publicity of security interests in relation to personal
property is thus necessary to avoid “the mischief of
false appearances of prosperity” (possession, of
course, being prima-facie evidence of ownership in
law!).
• The Act commenced operation on 30 January 2012 and is
one of the most important (and radical) commercial-law
reforms in recent Australian legal history.
• This publicity is typically given through statutory
registration regimes, e.g., the ASIC Register of
Company Charges and State- and Territory-based
registers of encumbered vehicles (REVS), various
State and Territory Bills of Sale Acts and Chattels
Securities Acts — all now superseded by the
Personal Property Security Register established under
the Personal Property Security Act 2009 (Cth).
Þ
The pre-existing law on secured financing and
personal property was long regarded as
unsatisfactory.
Þ
It was complex, costly, confusing, uncertain,
inaccessible, out-dated, piecemeal, and arbitrary in
its reach.168
Þ
It was also highly fragmented and variable as
between the various Australian States and
Territories.
Þ
Moreover, the pre-existing law was notorious for
drawing fine legal distinctions that were without
real substance (but which could nevertheless trap
the unwary).
* * * * * *
168
Depending on the type of personal property involved, registration under the old
system could be expensive. There was also a lot of overlap in the various
applicable laws and regimes, leading to duplication and uncertainty. Some
jurisdictions required some interests to be registered more than once, and some
transactions had to be registered in more than one jurisdiction. Whether security
interests in personal property could, should or needed to be registered under the
pre-existing law depended on a matrix of variables such as jurisdiction, the type
of interest involved, the class of debtor, the type of property, the location of the
property, and the type of transaction.
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operates as a “noticeboard” of security interests held in
personal property.
• The PPSA thus seeks to bring order to the laws relating
to security over personal property (security over land is
unaffected by the Act), repealing just about all of the old
law and replacing more than 70 existing Commonwealth,
State and Territory Acts, administered by over 30
government departments, with a single national law.
Þ I.e., the PPS Register enables secured parties to
give notice to the world of actual or prospective
security interests in the collateral (secured
property). Such notice is given by lodging/filing on
the PPS Register, via s 150 of the Act, a
“financing statement”,169 which is a standardized
electronic form recording “summary” data about
secured parties, grantors and the collateral (see the
table at s 153(1) as to what must be included in the
financing statement170).
• The regime abolishes a number of established
principles of commercial law, such as the distinction
between legal and equitable security interests, and
between fixed and floating charges. It basically rewrites
Australian law relating to:
Þ
How security interests are effectively created;
Þ
How security interests can be enforced;
Þ
How priority disputes are resolved where two
or more security interests have been granted
over the same item of personal property; and
Þ
The circumstances in which a security interest
can be extinguished against the wishes of the
secured party (i.e., where a third party, such as
a purchaser or lessee, will take the property free
of the security interest even though the secured
party does not consent to or authorize the
transfer).
• As one of its core reform components, the PPSA
establishes a single national online system governing the
use of personal property as security in Australia, called the
Personal Property Securities Register (“PPS Register”)
<http://www.ppsr.gov.au>.
• The PPS Register is an inexpensive, user-friendly,
remote-access electronic register, administered by the
Australian Financial Security Authority (“AFSA”), that
Þ Thus, as with the previous registration regimes,
the registration of a security interest on the PPS
Register reduces the potential for innocent third
parties to be misled by a grantor’s/debtor’s
possession of the secured property, i.e., causing
them to believe that no other interests exist in it
— again, “the mischief of false appearances of
prosperity”.
Þ Note, too, that the Act establishes rules and criteria
around searches of the PPS Register (ss 170–
173); importantly, if a search is to be conducted by
reference to the details of the grantor who is an
individual, it can only be for one or more of the
“permitted purposes” listed in the table to s 172(2)
169
170
So, in contrast to the previous law, the actual document(s) creating the security
are not registered.
Unsurprisingly, these are such matters as the secured party’s details, the
collateral details (including class and description), the grantor’s details, and
certain registration details (including the desired end-time for the registration).
The PPS Regulations 2010 (Sch 1, reg 2.3) set out the various classes (e.g.,
financial property, motor vehicles, aircraft, watercraft, all present and afteracquired property (with or without specific exceptions), intangible property,
agriculture, other goods).
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(basically so as to ensure that privacy requirements
are met).171
details are searched — it will not tell the searcher whether
the grantor/debtor “owns” a particular chattel or not.
Þ A defective registration will only invalidate a
registration where any error in the data on the
financing statement is “seriously misleading”,
determined objectively (s 164),172 or is one of the
particular defects listed in s 165 (e.g., the financing
statement says the security interest over the
collateral is a PMSI but it’s not).
Þ Nemo dat law thus continues to be relevant:
innocent purchasers or financiers will have no
means of discovering (or protecting themselves
against) claims by the true owner or interests
created by the true owner (unless an exception to
nemo dat applies under the Act).
• A distinctive feature of the PPSA regime is that it applies
whatever legal form is adopted to achieve the
substance of “security” over personal property, i.e.,
security rights receive uniform treatment under the Act
regardless of the particular form they might take.
• Note, too, that the PPSA creates an “interest” regime and
not a “title” regime.
Þ Priorities between security interests are determined
not by the whereabouts of legal title, but rather by
the rules in the Act.
“The Court of Appeal in the present appeal did not look past the
traditional concepts of title and ownership. But this dispute
cannot be resolved through the determination of who has title
to the car because the dispute is one of priority to the car and
not ownership in it.”173
• It follows that the PPSA does not guarantee title (like the
Land Title Act 1994 (Qld) does in relation to Torrenssystem land), and the PPS Register will only reveal
security interests granted by the grantor/debtor whose
171
172
173
Breach of the authorized search purposes is both a civil (s 172(3)) and criminal
(part 7.4, Criminal Code Act 1995 (Cth)) offence.
This is one of the most litigated issues under PPSA regimes overseas.
Re Giffen (1998) 155 (4th) 332 (SCC) [28].
• Consistent with its radical overhaul of the pre-existing law,
the PPSA also introduces a raft of new terminology
designed to complement the Act’s concepts and
operations; for example:
Pre-PPSA Terminology
PPSA Equivalent
“Financier”, “mortgagee”,
“chargee", “lender”, “retention-oftitle supplier”, “lessor”, etc.
“Secured party”
“Borrower”, “mortgagor”,
“chargor”, “lessee/bailee”
“Grantor”
“Secured property”
“Collateral”
“Financing agreement”,
“mortgage”, “charge”, etc.
“Security agreement”
“Fixed charge”
“Security interest”
“Floating charge”
“Circulating security interest” (or
“security interest in circulating assets”,
or a “General Security Agreement”
(“GSA”) in other PPSA-style
jurisdictions)
“Retention-of-title transactions”,
“leasing finance”, “hire-purchase
arrangement”, “consignment”
“PPSA retention-of-title property”
“Retention-of-title” or “Romalpa”
security interest
“Purchase Money Security Interest”
(or “PMSI”)
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• The meaning of “security interest” is considered below
(next).
• Note that on 18 March 2015, the Attorney-General’s
Department released the final report of Review of the
Personal Property Securities Act 2009 (the “Whittaker
Report”), which, at 530 pages, contains 394
recommendations for improving the Act, including
simplifying both the Act and the PPS Register. (The list of
recommendations can be found in Appendix E at p 502 of
the Report.)
• As for the meaning of “personal property”, s 10 of the
PPSA provides:
“personal property means property (including a licence) other than:
(a)
(b)
(i) granted by or under a law of the Commonwealth, a State or a
Territory; and
(ii) declared by that law not to be personal property for the
purposes of this Act.”
Þ As yet the Act has not been amended, and so
these notes are directed at the Act in its current
form.
• Accordingly, the Act will apply to security interests in
relation to almost every type of property except land (see
s 8(1)(f)), water rights (s 8(1)(i) and (5)), and certain
declared statutory interests.
• Note, also, s 254 of the PPSA, which deals with the Act’s
relationship to other laws in Australia (e.g., where there is
a conflict between the PPSA and some other law):
• “Land” is defined as comprising “all estates and interests
in land, whether freehold, leasehold or chattel, but does
not include fixtures” (s 10). Interests in “fixtures”
(meaning “goods, other than crops, that are affixed to
land” (s 10)) are separately excluded from the Act’s
application by s 8(1)(j).174
254 Concurrent operation — general rule
(1)
This Act is not intended to exclude or limit the operation of any of the
following laws (a concurrent law), to the extent that the law is capable of
operating concurrently with this Act:
(a) a law of the Commonwealth (other than this Act);
(b) a law of a State or Territory;
(c) the general law.
Þ Note that a consequence of this exclusion of
chattels that have become fixtures is that the law
in such cases as Kay’s Leasing Co Pty Ltd v
CSR Provident Fund Nominees Pty Ltd [1962]
• (There are other provisions in the PPSA providing for
when the PPSA will be overridden by other laws (see, in
particular, Div 3, Pt 7.4 of Ch 7 — s 254 is merely the
“general rule”).)
174
Scope of the PPSA
• As the PPSA applies to “security interests” granted in
relation to “personal property”, its scope is determined
by the meaning given to each of those two terms.
land; or
a right, entitlement or authority that is:
Some students may notice an odd move here. Since fixtures are “land”
according to the general-law meaning of land, they might have been excluded
simply without specific mention. But it appears that the Act’s drafters took the
step of specifically excluding fixtures independently of the general exclusion of
land so as to clarify the scope of the Act. The reality is that goods that are
subject to personal property security interests do get attached to land as fixtures,
and so it reduces ambiguity just to say that they are excluded from the PPSA
rather than simply relying on a definition of personal property that excludes
“land” tout court. Still, differences between the Act’s definition of “fixture” and the
general law’s conception of same may well give right to issues in determining the
scope and application of the PPSA.
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VR 429 and Whenuapai Joinery (1988) Ltd v
Trust Bank Central [1994] 1 NZLR 406 will
continue to apply. Rights in fixtures thus remain
to be governed by the Land Title Act 1994 (Qld).
• The broad (but not comprehensive) definition of “personal
property” in s 10 makes it clear that the Act applies to both
tangible personal property (e.g., motor vehicles, aircraft,
watercraft (including ships)), office furniture, artwork, plant,
equipment, crops, livestock and financial property175), and
intangible personal property (e.g., intellectual property,
licences, payment obligations (receivables) and financial
instruments such as shares and debentures).
to consensual security interests only, not those arising by
operation of law.176
What Is a “Security Interest”? The PPSA’s
“Functional” Approach
• “Security interest” is probably the most fundamental
concept under the PPSA, as the Act applies only to
security agreements that create “security interests” in
personal property. (“Security interest” is defined in s 12(1)
of the Act (below).)
• A major problem with the pre-PPSA law was that it
generally had regard to the legal form of the transaction
to determine its consequences, rather than its underlying
economic purpose and effect; however, a major
innovation in the PPSA is that it has abolished the preexisting distinctions based on form in favour of a
“substantive”, “functional” or “substance-over-form”
approach to what constitutes a “security interest” in
personal property.
• Section 8 of the PPSA tells us what the Act does not
apply to. Notable exceptions include:
Þ
Security interests created by statute or
otherwise arising by operation of law (e.g.,
trade and solicitor’s liens, constructive trusts and
equitable liens) (s 8(1)(b) and (c));
Þ
Rights of set-off and combination of accounts: s
8(1)(d);
Þ
Interests in land (including fixtures): s 8(1)(f)
and (j); and
Þ
A security interest taken by a pawnbroker
where, when the interest is taken, the value of
the underlying property is less than $5,000: s
8(1)(ja) and (6).
Þ All transactions that, in economic substance,
involve security for the performance of a personal
obligation are thus treated in a generic manner.
Þ A simple test is to ask whether the arrangement
between the parties involves one party having a
right to take possession of or otherwise deal
with the other party’s personal property in the
event of that other party (or indeed a third party)
defaulting in their performance of an obligation
owed — if so, then the arrangement is in
• The first-mentioned exclusion also underscores an
important point about the scope of the PPSA: it applies
175
Financial property is itself a defined term (s 10) and means chattel paper,
currency, and investment instrument or negotiable instrument (each of which has
in turn its own specific definition).
176
See also Canadian Imperial Bank of Commerce v 64576 Manitoba Ltd [1990] 5
WWR 419; Dura (Australia) Constructions Pty Ltd (in liq) v Hue Boutique Living
Pty Ltd [2014] VSCA 326.
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substance a “security interest” in relation to that
property and the PPSA will apply to it.
–
–
–
–
• All this is apparent from the definition of “security
interest” in s 12(1) of the Act:
• Importantly, notice how that, in virtue of the “functional”
definition of security interest in s 12(1) (exemplified in s
12(2)), the PPSA applies to many commercial
arrangements that were not formerly conceived of as
“security transactions” or treated as involving “security
interests” in personal property — notably, retention-of-title
(or Romalpa) provisions under supply arrangements, hirepurchase agreements, consignments and chattel leases.
“A security interest means an interest in personal property provided
for by a transaction that, in substance, secures payment or
performance of an obligation (without regard to the form of the
transaction or the identity of the person who has title to the
property).”177
• So, included (non-exhaustively) as “in substance
security interests” would be such transactions as (see
PPSA, s 12(2)):
–
–
–
–
–
–
–
–
177
178
a lease of goods (whether or not a PPS lease);
an assignment;
a transfer of title;
a flawed asset arrangement.179
Þ Basically, on the Act’s “substance-over-form”
approach, such title-based arrangements are
treated as outright sales coupled with a loan to
a fixed charge;
a floating charge;
a chattel mortgage;
a conditional sale agreement (including an
agreement to sell subject to retention of title);
a hire purchase agreement;
a pledge;
a trust receipt;
a consignment (whether or not a commercial
consignment);178
“(a)
(b)
(c)
For a discussion of some of the issues raised by this definition of “security
interest”, see J Stumbles, “The PPSA: The Extended Reach of the Definition of
the PPSA Security Interest” (2011) 34 University of New South Wales Law
Journal 448
In Re Arcabi Pty Ltd (in liq) [2014] WASC 310, Sanderson M (at [31]) accepted
the following definition of “consignment” (from Canada) for the purposes of the
Australian PPSA: “In its simplest terms, a consignment is the sending of goods
to another. An arrangement whereby an owner sends goods to another on the
understanding that such other will sell the goods to a third party and remit the
proceeds to the owner after deducting his compensation for effecting the sale is
an example of a consignment agreement” (Re Stephanian’s Persian Carpets Ltd
(1980) 34 CBR (NS) 35 (Saunders J)). Sanderson M (at [32]) additionally
accepted the following 15 indicia to characterize a consignment (following
Access Cash International v Elliot Lake Inc & North Shore Corp for Business
Development (2000) Carswell Ont 2824 (Molloy J)):
179
the merchant is the agent of the supplier;
title to the goods remains in the supplier;
title passes directly from the supplier to the ultimate purchaser and
does not pass through the merchant;
(d) the merchant has no obligation to pay for the goods until they are sold
to a third party;
(e) the supplier has the right to demand the return of the goods at any
time;
(f)
the merchant has the right to return unsold goods to the supplier;
(g) the merchant is required to segregate the supplier’s goods from his
own;
(h) the merchant is required to maintain separate records;
(i)
the merchant is required to hold sale proceeds on trust for the supplier;
(j)
the goods are shown as an asset in the books and records of the
supplier and are not shown in the books and records of the merchant
as an asset; and
(k) the supplier has the right to stipulate a fixed or floor price.”
“Flawed asset arrangement” refers to the pre-PPSA practice of financiers (such
as banks) entering into agreements with customers that allow them to set off
money owed on account against money owed to the financier — i.e., the
customer deposits money with the bank on the condition that it is repayable only
when the customer has discharged its obligations to the bank in relation to other
accounts. This arrangement came about because it was unclear in Australia
whether a financier could take a charge over a deposit account held with it.
Under the PPSA, however, an authorized deposit-taking institution (ADI) can
take a security interest in an ADI account kept with the ADI: see PPSA, s
12(4)(b).
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finance the purchase and a security interest in the
goods/collateral to secure performance of the
debtor’s repayment obligation.
agent) purchasing accounts receivable from
businesses at a discounted price for the benefit of
future payments the accounts receivable will
generate);
“The PPSA equates conditional sale agreements
[consignments, leases, etc.] with other forms of security
interest because they are functionally equivalent: in all
cases, the objective is to give A an interest in B’s asset that
would allow A to access the asset if B (or a third party)
defaulted on an obligation owing to A.”180
Þ
– the interest of a consignor who delivers goods to a
consignee under a commercial consignment (as
defined in s 10 — e.g., a floor-plan arrangement);
– the interest of a lessor or bailor of goods under a
PPS lease (as defined in s 13 — e.g., leases or
bailments of goods for a term exceeding one year
where the lessor or bailor (for value moving from the
bailee — i.e., not “gratuitous” bailments) is regularly
engaged in the business of leasing or bailing
goods).182
Accordingly, a creditor’s (formal) status as “owner”
in any title-based arrangement caught by the
PPSA will no longer protect them if they do not
follow what is required to protect their interests
under the Act!
• It may in some cases be ambiguous as to whether a
particular transaction involves an in-substance security
interest or not, and so the PPSA extends the definition of
security interest by deeming certain commercial
transactions to be “security interests” even though they
may not pass the “functional” test in s 12(1).
Þ I.e., security interests can arise in certain situations
even if the transaction does not secure payment or
performance of an obligation.
• Note, also, that the Chapter 4 enforcement provisions
(below) do not apply to deemed security interests (as
these are brought under the PPSA only for registration
and priority purposes): s 109.
The Creation and Protection of Security
Interests under the PPSA
• The PPSA establishes rules — indeed a code — for the
creation and protection of effective security interests.
Þ Such deeming occurs because of the perceived
danger of third parties being misled as to true
ownership.
• Different rules apply to determine:
• The “deemed security interests” are (s 12(3)):
– the interest of a transferee under a transfer of an
account or chattel paper181 (e.g., a factor (commercial
180
181
Anthony Duggan and David Brown, Australian Personal Property Securities Law
(2nd ed, 2016) 59.
“Chattel paper” is defined in s 10 to mean writing (including in electronic form)
that evidences a monetary obligation and either or both a security interest in or
182
lease of specific goods or specific intellectual property. It can therefore include
equipment leases, hire-purchase agreements, chattel mortgages and possibly
certain retention-of-title supply arrangements. It does not include a “document of
title”, “investment instrument”, “investment entitlement” or “negotiable
instrument”.
Leases for longer than one year generally (but do not always) serve as devices
for financing the acquisition or effective ownership of an asset. We will return to
the topic of leases and bailments below.
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1. when a security interest will be enforceable against
the grantor (known as “attachment”);
give the creditor proprietary rights over it (i.e., it is
similar to the concept of “the creation of legally
binding relations” in contract law).
2. when a security interest is enforceable against third
parties; and
3. what steps can be taken to protect a security interest
from being defeated by a competing interest (known
as “perfection”).
Þ Basically, the creditor has no proprietary interest
in the asset until a security interest has “attached”
to it, after which time the asset is referred to in the
Act as “the collateral”.184
Þ I.e., what is involved is a three-stage process of
“attachment”, “enforceability against third
parties”, and “perfection” (which steps may be
taken in any order: s 21(3)).
• Under s 19(2), and unless the parties agree to defer
attachment to some later time (s 19(3)), a security interest
attaches to personal property, making the security
interest enforceable against the grantor, if:
Þ If all three stages are complied with, then (and
only then) the secured party will receive the
greatest degree of protection achievable
under the Act.
(a) The grantor has rights in the collateral (or the
power to transfer rights in the collateral); and
(b) Either value is given for the security interest, or
the grantor does an act that causes the security
interest to arise.185
1. Attachment (security rights inter partes): s 19
Þ Note that for the purposes of (a), even rights
as bailee — bare possessory rights — will
suffice for this purpose: s 19(5) deems
possession to confer sufficient rights,186
which reflects the position found in other
PPSA jurisdictions.187 Although even fragile
• “Attachment” denotes the moment of creation of a
security interest with respect to the parties to the
security agreement — without attachment, a security
interest is unenforceable as between the
grantor/debtor183 and the secured party/creditor: s 19(1).
Þ The effect of attachment is that the security
interest fastens on the asset in question so as to
183
The Australian PPSA is unique among the generic regimes in that it uses the
term “grantor” (defined in s 10) rather than, as elsewhere, “debtor”, to describe
the party who gives a security interest to another (the “secured party” or holder
of the security interest: see s 10 definition of “secured party”). Typically, the
grantor will be a borrower/debtor, but that does not always follow (see s 10
definition of “debtor”), as the grantor may well be a third party who gives a
security interest to secure performance of the debtor’s obligations to the secured
party. Unless context requires otherwise, I shall use the terms “grantor” and
“debtor” interchangeably, simply for ease of comprehension from time to time
(i.e., I shall assume a two-party transaction rather that a three-party one). It is,
however, important to become familiar with, and to adopt (accurately and
consistently), the new language of the PPSA!
184
Section 10 of the PPSA defines “collateral” as “personal property to which a security
interest is attached”, and also as including “in relation to a registration with respect to a
security interest”, “personal property described by the registration (whether or not a
security interest is attached to the property)”.
185
It is unclear what is meant by “doing an act that causes the security interest to
arise”, which is a provision unique to the Australian PPSA. Perhaps it means
execution of a deed where there might otherwise be a problem with
consideration.
So, a consignee, purchaser, lessee or bailee can grant a security interests in its
present and future property to a bank, and that security interest may extend to
the goods possessed by it and subject to a retention-of-title arrangement,
consignment, lease or bailment but which is in fact owned by a third party.
See, e.g., Kinetics Technology International Corp v Fourth National Bank of
Tulsa, 705 F 2d 396 (1983); Graham v Portacom New Zealand Ltd [2004] 2
NZLR 528. So far, this approach is being accepted in Australia as well: In the
186
187
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rights may suffice for “attachment” purposes
(e.g., a trustee fraudulently gives a security
interest in trust property), it does not follow
that they will necessarily prevail in a priority
dispute (e.g., between the secured party and
the defrauded beneficiaries) down the track.
For attachment purposes, the secured
party’s rights can only extend to whatever
rights the grantor itself held in the collateral
(e.g., bare possession), but the strength of
those rights in a priority dispute relative to
competing claims to the same collateral will be
determined by the applicable priority rules
(below) — and for registration and priority
purposes, the bailee will be treated as owner
of the collateral!
• Also, although “attachment” is a prerequisite to
“perfection” under the PPSA (below), it need not occur
before perfection (s 21(3)). For example, a secured party
can register a financing statement that purports to attach
to “all present and after-acquired property” of the grantor.
Once the grantor acquires rights over the relevant future
property, attachment of the security interest will occur at
that time (s 18(3)).
Þ
2. Enforceability against third parties (rights in rem): s 20
• Once the security interest is attached to the particular
collateral, further steps are generally188 required to
render it enforceable against a person other than the
grantor (e.g., another secured party) — either:
Þ For the purposes of (b), “value” is defined in s
10 as including “consideration that is sufficient
to support a simple contract” (although there is
a separate meaning of value relating to PMSIs
in s 14), and so a mere promise to lend will
suffice for the purposes of s 19(2).
Þ the secured party possesses the collateral (in the
case of a possessory security interest such as a
pledge);189 or
• Section 19 presupposes that a valid security agreement
is in place between the parties (the PPSA applying only to
consensual security rights over personal property, which
can only be created by agreement).
Þ
Note that a mere oral security agreement will
suffice to bind the grantor and secured party inter
partes, although it will not suffice for the purpose of
giving proprietary rights against third parties in
respect of the particular collateral (next).
Pre-registering like this is a prudent move, as the
secured party gets the benefit of perfection from
the time of registration rather than the time of
attachment: s 55(5).
Þ has perfected the security interest by control;190
or
Þ more commonly, the parties’ security agreement
is evidenced by writing,191 which writing is either
188
matter of Maiden Civil (P&E) Pty Ltd [2013] NSWSC 852; Bredenkamp v Gas
Sensing Technology Corporation, in the matter of Welldog Pty Ltd (In Liq) [2017]
FCA 1065. (although a PPS lease was not ultimately found)
I.e., where perfection is not otherwise deemed by the Act.
As to which see ss 23–24 of the Act.
As to which see ss 25–29 of the Act. In practice, control is really only relevant for
financial institutions (e.g., a bank has control over the funds in a customer’s bank
account).
It would appear that s 20 is a statute-of-frauds-type provision that enables thirdparty creditors to identify the existence of security interests in identified
collateral. This is an important capacity as, unlike the pre-PPSA registration
regimes, the PPSA does not require the actual security agreement to be lodged
as part of the registration process, merely a “financing statement”. Since the
PPSA also allows for the registration of the financing statement even before any
200
201
189
190
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signed by the grantor or otherwise adopted or
accepted by his or her conduct, which written
evidence also adequately describes the
particular collateral by item (e.g., “2015 green
John Deere 6620 tractor”) or class (e.g., “all of the
grantor’s printing equipment and machinery”; “all
inventory supplied by us [with or without specified
exclusions]”;“all of the grantor’s present and
after-acquired property … [with or without the
exclusion of specified items or classes of personal
property]”).192
Þ
It is the state when all the formalities required by
the PPSA system in respect of the taking of a
security interest have been met.
Þ
It involves “attachment” (s 19), AND “enforceability
against third parties” (s 20), AND the taking of
“further steps” in the manner of publicity — either
(s 21):
• The reference in s 20(1) to the security interest being
“enforceable against a third party” is a bit misleading, as
it is clear that this second step does not provide protection
against insolvency of the grantor or a wrongful dealing
with the collateral; nor does it assure priority in a
competition with other secured parties holding interests in
the same collateral Þ all that requires the next step of
“perfection”.
3. Perfection: ss 21–22
• “Perfection” is a technical concept particular to the
PPSA, and it refers to the process by which the holder of
a security interest obtains the optimal level of
protection afforded by the Act.
193
194
192
security agreement is entered into between a grantor and secured party, a third
party should be able to corroborate whether or not a valid security agreement
was actually entered into. See Anthony Duggan and David Brown, Australian
Personal Property Securities Law (2nd ed, 2016) 114–5.
Note that s 20(4) provides that if particular personal property is described using
the term “consumer property” or “commercial property” in the writing evidencing
a security agreement, the personal property must be more particularly described,
in addition, by reference to item or class.
195
Þ
registration by the secured party of its
interest in the collateral on the PPS Register
— available for any type of collateral (but,
obviously, it will be the key perfection step
where the secured party has surrendered
possession of the collateral);193 or
Þ
in the case of possessory securities, the
secured party obtaining exclusive
possession of the collateral (other than as
a result of seizure or repossession: s
21(2)(b)194); or
Þ
in the case of bank accounts (and certain
other financial instruments — not to mention
“satellites and other space objects”!), the
secured party having control of the
collateral.195
Note that it is not necessary to wait until the security interest has been granted
before registering it; it is possible to register it even before it has been granted: s
161. Also, a single registration may perfect one or more security interests, which
is important for parties to ongoing supply arrangements.
This limitation is designed to remove the incentive for creditors to enforce their
unperfected security interests in order to perfect them for priority reasons. The
intention of the PPSA regime is that creditors without possession or control of
the collateral should be perfecting by registration!
The idea here is that although the secured party does not have physical
possession of the collateral, they can nevertheless control it through the exercise
of a power that deprives anyone else dealing with it against their interests.
“Broadly speaking, a secured party has control if it is in a position to transfer the
collateral to a third party without needing the grantor’s cooperation”: Anthony
Duggan and David Brown, Australian Personal Property Securities Law (2nd ed,
2016) 132.
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• Perfection is thus the last step required for the secured
party to preserve the priority of their security interest in
the collateral: it is the quality that broadcasts to the
world the existence, or possible existence, of security
rights over the collateral, thereby safeguarding third
parties — strangers to the written security agreement —
who might otherwise be lured into providing credit, and
themselves acquiring an interest in the collateral, by the
“apparent wealth” of the grantor.
Þ
Þ
Subsequent takers of security interests,
especially, will want to know whether the collateral
is subject to earlier security interests, as under
the PPSA’s priority rules (below), once an
interest is validly perfected it will (unless an
exception applies) take priority over
subsequently perfected interests.
A failure to perfect will thus expose the secured
party to the risk that its security interest will rank
behind other security interests in the event of a
priority dispute, or it might even be extinguished
entirely (e.g., if the grantor transfers the collateral
to another person for value).
• So, by “perfecting” its security interest (which will occur
most commonly by registration on the PPS Register), the
secured party’s interest:
Þ
will have priority over an “unperfected” security
interest or general security interest;
Þ
will have priority over all other perfected security
interests in accordance with their “priority time”
under the Act (except those accorded “superpriority” under the Act);
Þ
will survive the grantor’s insolvency/bankruptcy
(whereas an unperfected security interest will
not: s 267);
Þ
will survive the sale or lease of the collateral to
buyers and lessees who are not covered by the
“taking-free” rules in Part 2.5 of the Act: s 32(1)
(whereas an unperfected security interest will
not: s 43); and
Þ
if described in the collateral description on the
financing statement, may cover the proceeds of
sale of the collateral (ss 31–33).
• Note that, in addition to registration, possession and
control as possible methods of perfecting a security
interest that has attached to collateral, the PPSA allows
43 Taking personal property free of unperfected
security interest
Main rule
(1) A buyer or lessee of personal property, for value, takes
the personal property free of an unperfected security interest
in the property.
Þ
196
Also, most security interests, if not perfected, are
particularly vulnerable to extinguishment if the
grantor is wound up or bankrupted: see 267.196
We need not dwell on the detail for the purposes of this course, but the PPSA
provides in s 267 that most (exceptions exist in s 268) unperfected security
interests (including most deemed security interests) vest in the grantor if the
grantor is wound up or bankrupted (so, for example, a lessor who hired goods to
the grantor under a PPS lease will lose their title to the goods, as they will form
part of the grantor’s distribution assets; the lessor will be left with a claim for
damages only, under s 269). (There is also a vesting rule in s 588FL of the
Corporations Act 2001 (Cth) for grantors that are companies. It covers the
situation where a PPSA security interest has been perfected but not for more
than 20 business days after the relevant security agreement creating it came into
force or within six months of the date of the relevant insolvency event, whichever
time is earlier.) In the case of deemed security interests (such as PPS leases), in
particular, this may result in a significant windfall gain for the liquidator or trustee
in bankruptcy at the expense of the secured party (who by virtue of the vesting
rules loses ownership in the collateral).
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for “temporary perfection” in some situations,197 and
also, in a few limited cases, the Act will deem a security
interest to be automatically perfected (e.g., where
collateral under a perfected security interest is disposed of
and the security interest attaches to the proceeds) =
“deemed perfection”.
Þ
In practice, then, it is the time of registration (or
the time of taking possession or control), and not the
time of perfection, that will determine the priority of
the security interest (provided the interest is in fact
subsequently perfected).
Þ
In the case of competing perfected security
interests, therefore, the general rule is that the first
to register a financing statement (or to take
possession or control, as the case may be) has
priority. A prudent creditor should thus register
first, perfect later (perfection could take a while —
e.g., delays in drafting the loan documentation).
• A secured party may perfect by more than one mode of
perfection (e.g., possession and registration): 56(2), which
might be desirable in some circumstances.
Þ
For example, in order to retain priority, the secured
party must maintain “continuous perfection” (s
55(6)), meaning that the perfected security interest
must not subsequently become unperfected (e.g.,
where there has been perfection by possession but
the secured party later loses possession, even
temporarily (although there are exceptions in ss 35
and 36)); if it is anticipated that possession will be
lost at any point, then such a secured party should
also perfect by registration.
• For how long does perfection by registration last?
Þ See item 5 in the table at s 153(1):
• For collateral other than consumer property or
property described by a serial number, the end
time can be up to 25 years or indefinite.
• For consumer property, the registration can
only be for up to 7 years.
• As earlier mentioned, attachment and the “further steps”
required for perfection may occur in any order: s 21(3).
Þ
197
198
It follows, therefore, that “perfection” and
“registration” are not synonymous: “perfection”
does not occur until attachment of the security
interest, whereas registration can take place
before attachment (or even before execution of the
security agreement).198
I.e., a security interest may sometimes be taken to be temporarily perfected
without any act on the part of the secured party, e.g., where property that is
subject to a security interest is brought into Australia, or collateral that is subject
to a perfected security interest is disposed of in circumstances where the
security interest is not extinguished by the disposal.
Section 161 of the PPSA provides that personal property may be described in a
registration with respect to a security interest before or after a security
agreement is made covering the property or before attachment of the security
interest to the property. However, s 151 provides that a person must not apply to
Þ A security interest that is perfected by registration
will become unperfected if the registration period
expires.
• Finally, and for removal of any possible doubt, security is
not invalidated by non-registration, thereby reducing the
creditor to “unsecured” status as against liquidators, the
trustee in bankruptcy and other creditors (compared to the
prior companies’ regime, for example); rather, the security
subsists, but subject to the codified rules as to
priority in the Act.
register a financing statement unless that person believes on reasonable
grounds that the person described in the financing statement as the secured
party is or will become a secured party in relation to the collateral.
206
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Þ
Þ
Therefore, unregistered secured creditors will still
prevail over unsecured creditors, including the
trustee in bankruptcy or a liquidator, but they will
risk losing priority to buyers and other secured
creditors.
For this reason, too, interested parties (such as
prospective creditors and liquidators) cannot
assume property to be free of encumbrances
simply because none appear on the register!
• In summary, then, the only real consequences of failing
to register (or otherwise perfecting) under the PPSA are:
–
–
–
authority for the grantor to deal with the property in the
ordinary course of business.
• There is no “pre-crystallization” stage, like under the old
floating-charge law — a security interest has either
“attached” or it has not: it attaches when the grantor
acquires each item of the secured property, and becomes
unattached when the grantor disposes of each item in the
ordinary course of business (the security interest then
attaching simultaneously to the disposal proceeds
unless the security agreement provides otherwise: s
32(1)).
• The Act largely achieves this result by virtue of a number
of provisions (in addition to those just mentioned):
subordination to a purchaser or lessee for value;
loss of priority to other secured parties who
register/perfect first (regardless of whether those
parties have notice of your interest); and
subordination to execution creditors.
•
Þ A security agreement may provide for
security interests in after-acquired property:
s 18(2);
Demise of the Floating Charge
• The PPSA renders redundant the traditional “floating
charge”, since under the Act the distinction between fixed
and floating charges ceases to be of significance.199
199
200
An agreement giving rise to a security interest is
effective according to its terms, which the parties
are at liberty to negotiate (s 18(1));
Þ A security interest in after-acquired property
attaches without specific appropriation by
the grantor (i.e., the security interest
attaches automatically upon acquisition of
the property by the debtor) (s 18(3));
• Under the PPSA, all security interests are notionally
fixed, i.e., the Act simply permits the creation of a security
interest over circulating assets (defined in s 340200),
such as stock-in-trade (inventory) and book debts
(accounts receivable), coupled with an express or implied
Þ To be enforceable against the grantor the
security interest must have “attached to” the
collateral (s 19(1));
The various provisions of the Corporations Act 2001 (Cth) have been modified to
take these changes into account,
Under this definition of circulating assets, the grantor is able to deal with and sell
the circulating assets subject to the security interest in the same way a borrower
under a floating charge transaction could deal with and sell the charged property
pre-PPSA.
Þ A reference to a floating charge in a security
agreement is not to be taken to be an
agreement that the security interest will
208
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Þ The security interest may attach at a later
time (than would occur if s 19(2) applied)
agreed to by the parties (s 19(3)); and
209
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attach at a date later than that provided for in
s 19(2) — i.e., when some so-called
“crystallizing event” occurs like under the old
law of floating charges: s 19(4).
Rule 1:
Perfected prevails over unperfected: s
55(3);201
Rule 2:
As between perfected security interests,
priority goes to the first to register or to
take possession or control (as the
case may be), regardless of the order of
perfection (provided that perfection does
subsequently occur): s 55(5);
Rule 3:
As between unperfected security
interests, priority is determined by the
order of attachment (i.e., the first to
attach will take priority): s 55(2).
• So essentially the parties can just enter into a general
security agreement providing that “the grantor hereby
gives the creditor a security interest in all of the grantor’s
present and after-acquired property” (s 20(2)(b)(ii) and (iii))
and the Act takes care of the rest!
• (Note that under the Corporations Act 2001 (Cth), s
588FJ, a security interest in a circulating asset may be
void if created within six months of the relation-back day.)
• These are the main priority rules, but they operate on a
“default” basis only and are subject to more specific
rules and exceptions contained in the PPSA.
The Priority Regime
• An important feature of the PPSA is that it establishes a
new set of rules for resolving priority disputes
between security interests in relation to the same
collateral.
Þ For example, a security interest that is perfected
by control will usually enjoy priority over all other
security interests (including PMSIs (below)), even if
those other interests were perfected first: s
57(1).202
• These replace the pre-PPSA statutory, common-law and
equitable priority rules.
Þ For example, a security interest arising in the
ordinary course of business and by operation of
law (e.g., a repair’s lien excluded from the PPSA’s
operation by s 8(1)(c) of the Act) will take priority
unless the person who holds the security interest
(the repairer-lienee in this example) acquired that
interest with actual knowledge that the acquisition
(i.e., the repair work that gave rise to the lien)
constituted a breach of the security agreement
Þ Knowledge and notice of a competing security
interest are virtually irrelevant in resolving priority
disputes under the Act.
• Note, however, that the Act’s priority rules can be
displaced by priority or subordination agreements
between secured parties: s 61.
• Basic priorities are determined in accordance with the
“default priority rules” found in s 55 of the Act:
201
202
I.e., the secured party’s failure to perfect its security interest induces a third party
to acquire an interest in the collateral, and so this rule protects the third party by
shifting the loss to the secured party.
This is a very narrow exception, as it is limited to particular collateral classes and
transactions that are capable of being perfection by control.
210
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example)204), even if they are perfected security
interests.
giving rise to the PPSA security interest in the
collateral: s 73(1).203
• Such rules include the following:205
• Two important exceptions to the priority rules concern:
a. Ordinary-course purchasers and lessees; and
Þ Section 43:
Buyers or lessees of personal
property for value take the
property free of an unperfected
security interest (unless they are a
party to the security agreement that
created the security interest),
whether or not the buyer or lessee
knew of the existence of the earlier
unregistered security interest.
Þ Section 46:
Buyers or lessees in the
ordinary course of the seller’s or
lessor’s business of selling or
leasing personal property of that
kind take the property free of any
security interest earlier given by the
seller or lessor, unless the buyer or
lessee actually knew that the sale
or lease was in breach of the
security agreement providing for the
security interest.206
b. Purchase-money financiers.
a. Protection for Purchasers and Lessees
• Part 2.5 of the PPSA (ss 41–53) contains what is
known as the “taking-free” or “extinguishment”
rules (but the general rule, of course, is that, if
collateral is disposed of, any perfected security
interest remains attached to the collateral in the
hands of the transferee (and so the collateral may
be “followed”), regardless of the state of the
transferee’s awareness as to that interest, unless
the secured party expressly or impliedly authorized
the dealing, in which case the collateral cannot be
followed but the secured party’s interest can
nevertheless be “traced” into the disposal proceeds,
unless the security agreement provides otherwise: s
32(1).)
• The extinguishment rules are a set of rules
describing the various circumstances when a
purchaser or lessee of collateral will take the
collateral free of any prior security interests in the
collateral (including ownership retained under a
conditional sale or hire-purchase arrangement (for
203
It is unlikely that a repairer’s lien will constitute such a breach, as it is more likely
that the security agreement will obligate the grantor to keep the collateral in good
repair so as to preserve the value of the collateral for the secured party under
that agreement, and so the grantor’s failure to carry out necessary repairs would
actually constitute the breach. The priority rule in s 73(1), therefore, effectively
means that the secured party must pay the repair bill if he or she wants the
collateral.
204
205
206
Hence the PPSA enacts significant further exceptions to the rule of nemo dat
quod non habet, as the grantor can pass on a better title than what she or he
had if one of the taking-free rules applies. See, generally, Denise McGill,
“Transfer of Title by Non-Owner: The Personal Property Securities Act 2009
(Cth) Exceptions to the Nemo Dat Rule” (2011) 39 Australian Business Law
Review 209.
Other exceptions, for example, concern personal property that may or must be
described by serial number (such as motor vehicles), where the serial number is
missing or incorrect, meaning that even if the prospective buyer or lessee had
searched the register, they could not have discovered the existence of a prior
security interest: ss 44 and 45.
Unfortunately, the phrase “in the ordinary course of business” is not defined in
the Act, although s 46 basically corresponds to, but supersedes, the pre-existing
rule in relation to floating charges. The rationale of s 46 is that an informed buyer
might expect that although a trader has created some security interest over its
stock-in-trade, any security agreement that was in place would allow the trader
212
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Þ Section 47:
the transferor (e.g., to receive all or part of the
purchase price from the transferee).
Known colloquially as the “garage
sale” provision. Buyers or lessees,
for “new value”207 of consumer
goods (i.e., personal property that
the buyer or lessee intends to use
predominantly for personal,
domestic or household purposes)
worth less than $5,000 will defeat
any prior security interest, whether
registered or not, provided that the
buyer or lessee did not know,
actually or constructively, that the
sale or lease was in breach of the
security agreement providing for the
security interest), and the personal
property is not of a kind that the PPS
Regulations 2010 provide may or
must be described by serial number
in a registration.208 This taking-free
rule applies both to business and
private sales of such goods (e.g.,
second-hand goods from private
sellers).209
b. Purchase-Money Finance: ss 62–65
• Under the PPSA, super priority is accorded to
PMSI-holders (essentially lenders, commercial
consignors, retention-of-title suppliers and lessors
who provide credit needed to purchase the
collateral — i.e., a PMSI is security over goods
acquired by the debtor pending payment of the
purchase price for the goods).210
• Such creditors generally211 enjoy priority over preexisting “general” (i.e., non-PMSI) security interests,
provided they “perfect” their security interest within
the strict time limits set out in the PPSA: s 62(1).
Illustration of PMSI super priority:
In March, Grantor gives Bank a security interest over all its
assets (i.e., “all present and after-acquired property”). Bank
promptly registers the security interest on the PPS Register.
In July, Grantor takes possession of an industrial compressor on
lease from HireCo. Before the machine was delivered to
Grantor, HireCo registered its security interest on the PPS
Register as a PMSI.
• Section 53 of the PPSA also provides that where a
transferee of personal property takes free of a
security interest under Part 2.5 of the Act, the rights
of the secured party are subrogated to the rights of
207
208
209
to sell its stock to members of the public in the ordinary way. Thus, the ordinarycourse purchaser exception is a necessary rule to allow people to deal with
businesses in the ordinary course without worrying about the existence of
security interests.
“New value” is defined in s 10 of the PPSA as “value other than value provided
to reduce or discharge an earlier debt or liability owed to the person providing
the value”.
E.g., motor vehicles, intellectual property, watercraft, aircraft and aircraft engines
(see PPS Regulations 2010, Sch 1, reg 2.2).
Owing to s 47, financiers of low-to-medium-value consumer goods — e.g., TVs,
stereos, washing machines, etc. — are not well protected by the PPSA!
HireCo’s security interest has priority over Bank’s security
interest even though it was created and perfected later in time.
• Such special priority is accorded to a perfected
PMSI because the provision of credit made it
possible for the debtor to acquire that asset, and
so “[i]f the purchase price is paid in priority to other
210
211
And so, if the grantor would not have been able to acquire the collateral but for
the secured party’s provision of finance/personal property, chances are that the
security interest at hand constitutes a PMSI.
A PMSI will still rank behind security interests that are perfected by control (s
57(3)) and certain transfers of accounts or chattel paper (ss 64, 71). This,
however, is only likely to create an issue where a PMSI is traced into proceeds.
214
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debts, other creditors cannot complain because they
are left no worse off than they would have been if
the asset had never been acquired by the debtor.”212
Þ
Now, though, the owner’s interest is just
treated as another “security interest” and he or
she must compete with other owners or
lenders who are secured parties; gone is the
informality previously enjoyed by retentionof-title suppliers.
Þ
However, the special priority status now
given to PMSI interest-holders gives back the
traditional priority afforded to “ownership”
interests, and the PMSI rules work to assign
the PMSI a significance in priority terms that
at least approaches (and in some respects,
improves) the pre-PPSA position.
Þ
The main “improvement” for PMSI-holders is
that it is now possible for the PMSI (as well as
non-PMSI security interests) to extend
automatically through to proceeds of sale (ss
32–33)213 and/or to processed or
commingled goods (ss 98–103), whereas
this, as the cases demonstrated, was highly
problematic under the pre-existing law.
• “PMSI” (i.e., “Purchase Money Security Interest”) is
defined in s 14 of the PPSA thus:
(1)
A purchase money security interest means any of the
following:
(a) a security interest taken in collateral, to the extent that it
secures all or part of its purchase price;
(b) a security interest taken in collateral by a person who gives
value for the purpose of enabling the grantor to acquire rights in
the collateral, to the extent that the value is applied to acquire
those rights;
(c) the interest of a lessor or bailor of goods under a PPS lease;
(d) the interest of a consignor who delivers goods to a
consignee under a commercial consignment.
• However, a security interest will not constitute a
PMSI if the grantor intends to use the collateral
predominantly for personal, domestic or
household purposes (s 14(2)(c)), unless the
collateral is of a kind that may or must be described
by a serial number (e.g., a motor vehicle): s
14(2A)(c).
Þ
• Of course, before the PPSA, title-based funding
(like hire purchase and supply under a Romalpa
clause) was a cheap and (more or less) effective
form of protection for the owner/supplier where the
customer/borrower became insolvent.
212
Robert Chambers, An Introduction to Personal Property Law in Australia (3rd ed,
2013) 522. In other words, the rationale for the super-priority rule is that an
earlier non-PMSI secured party should not benefit by having recourse to assets
of the grantor that would not have been acquired but for the assistance of the
subsequent financier. If the subsequent PMSI-holder were not to enjoy
enhanced priority, they might have abstained from advancing the financial
assistance necessary for the grantor to acquire the collateral in furtherance of his
or her business.
213
214
Note that, under s 101, the PMSIholder’s priority in processed or mixed
goods will be limited to the value of the
goods they supplied on the day on
which those goods became part of the
mass or new product, thereby avoiding
the “windfall” problem that troubled
judges under the pre-existing Romalpa
law.214
However, a non-PMSI security interest granted over an account purchased by a
factor, and into which into the proceeds of inventory are paid, may still take
priority over the PMSI in the proceeds: s 64.
See, e.g., Clough Mill Ltd v Martin [1985] 1 WLR 111, 117 (Goff LJ).
216
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• But “PMSI” status is no guarantee of super-priority
(as opposed to basic validity215) unless the required
steps are taken: the financing statement that is
registered must state that the security interest is a
PMSI, and the strict deadlines for registration for
inventory and non-inventory, respectively, must be
observed as follows:
Where the collateral
is tangible property
Where the
collateral is
inventory
(s 62(2)):
Where the
collateral is
not inventory
(s 63(3)):
216
• Chapter 4 of the PPSA contains a detailed set of rules217
dealing with the way in which a secured party can enforce
its security interest in personal property — i.e., the “rights
and remedies” of enforcement of the security interest upon
default under the security agreement.
Where the collateral
is intangible
property
The security interest
must be registered
before the grantor
obtains possession of
the collateral.
The security interest
must be registered
before the PMSI
attaches, or is
created, over the
inventory.
The security interest
must be registered
within 15 business
days of the grantor (or
someone at the
grantor’s request)
obtaining possession of
the collateral.216
The security interest
must be registered
within 15 business
days of the grantor
(or someone at the
grantor’s request)
obtaining possession
or the time of
attachment, or
creation, of the
PMSI.
• Priority between perfected competing PMSI-holders
is determined in accordance with s 63.
215
The Enforcement Regime
I.e., a PMSI that is not registered within the designated timeframes is still validly
created; however, it will not benefit from the PMSI super-priority. In other words,
the secured party continues to enjoy a security interest but the default priority
rules will apply.
Hence, given the approach taken to PMSIs under the Act, non-PMSI creditors
replying on existing assets as collateral should, before advancing funds to the
grantor, wait 15 business days after registering their financial statement, and
then search the register again at that time.
• Note that security agreements do not need to include
these rights and remedies, and the parties may instead
rely on the PPSA enforcement regime (where it
applies218).
• However, the PPSA enforcement provisions are not
exclusive: they complement other rights and remedies
available, whether sourced in statute law, common law or
equity: s 110.
• Indeed, the parties are largely able to contract out of the
enforcement provisions, provided the collateral is not used
predominantly for personal, domestic or household
purposes (s 115).219
• Note (relatedly), that certain Chapter 4 provisions do not
apply where the grantor uses the collateral predominantly
217
218
219
These rules are modelled, it would seem, on the “chattel mortgage” style of
security, i.e., “seizure” and then “disposal or retention”.
And, of course, it does not always apply. For example, it does not apply to
deemed security interests (which are brought under the PPSA only for
registration and priority purposes): s 109; nor does it apply to property of a
corporate grantor if the property is in the hands of a receiver, controller or
receiver and manager under Part 5.2 of the Corporations Act 2001 (Cth): s 116
(and see In the matter of Maiden Civil (P&E) Pty Ltd [2013] NSWSC 852 at [81]–
[82], [92]). And most of the rules also do not apply to a person who has perfected
a security interest in shares or other investment property by taking possession or
control: s 109(3).
Unsurprisingly, this has led to the proliferation of the typical “PPS clause” sought
by financiers and retention-of-title suppliers seeking displacement of the Chapter
4 rights that might otherwise impede enforcement.
218
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for personal, domestic or household purposes (even if the
collateral secures a business debt) (s 109(5)), but Chapter
4 generally applies (ss 117 and 118 are excepted) in
relation to a security interest to which the National Credit
Code applies (i.e., mainly where credit is, for a charge,
provided by a professional lender to natural person for
personal, domestic or household purposes) (s 119).220
Þ
Seizure and Disposal or Retention of the Collateral:
• On the grantor’s default under a security agreement, the
secured party can commence enforcement.
• The first step is for the secured party to seize the
collateral “by any method permitted by law”222 (s 123)
(although if a subordinate secured party seizes the
collateral, they are vulnerable to having it subsequently
seized from them by a secured party with a higher security
interest (s 127)).
In cases where both the PPSA and the NCC apply,
the NCC provisions (Pt 5: “Ending and enforcing
credit contracts, mortgages and guarantees”) will
prevail to the extent of any direct inconsistency: s
258 PPSA.
• Having seized and obtained possession of the collateral,
the secured party may then either dispose of the collateral
or retain it (s 128).
• Where the enforcement rules do apply, they impose a
number of restrictions on the way in which a secured
party may enforce its security interest.
Þ
Þ
220
221
• Disposal occurs through exercise of a power of sale (s
128), in which case the secured party must give notice of
the intended sale to the grantor and other secured parties
with a higher-priority security interest (s 130).223
Most broadly, the Act requires that all rights, duties
and obligations arising under Chapter 4 must be
exercised or discharged both honestly and in a
“commercially reasonable manner”: s 111(1).221
It is not “dishonest” simply to use the enforcement
provisions knowing that enforcement will destroy
the rights of others: s 111(2).
Section 119(2) of the PPSA further provides that the PPS Regulations 2010
(Cth) may provide that specific Chapter 4 provisions are deemed to have been
complied with if the corresponding NCC provisions have been complied with.
Regulation 4.1 specify the following provisions: s 130 PPSA and s 102 NCC; ss
128, 131 PPSA and s 104 NCC; s 132 PPSA and s 104(3) NCC; s 140 PPSA
and s 105 NCC.
See S Colley, “Enforcing Rights under the PPSA: Honestly and in a
Commercially Reasonable Manner” (2013) 21 Insolvency Law Journal 109.
Similarly, an administrator disposing of property of a company by way of sale
must act reasonably in exercising the power of sale (Corporations Act 2001
(Cth), s 442CB) and distribute the proceeds of sale in accordance with the PPSA
distribution rules (Corporations Act 2001 (Cth), s 442CB; PPSA, s 140).
222
223
224
Þ
The notice must include particulars of the collateral,
the enforcing secured party, and the manner of
sale (s 130(2)).
Þ
The secured party exercising a power of sale must
exercise all reasonable care to obtain market value
for the collateral, or else obtain the price that is
reasonably obtainable (s 131).224
Þ
The purchaser under the sale takes the collateral
free of the security interests of the secured party
So, for example, it must be peaceable. The secured party cannot use unlawful
force. If peaceable seizure is not possible, a court order for seizure will be
necessary. If the NCC applies, the NCC rules for seizure must be followed in
order to be compliant with s 123 of the PPSA.
Section 130(5) of the PPSA lists various circumstances where notice of disposal
of the collateral is not required.
Breach of this obligation will sound in damages under s 271 of the PPSA.
220
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and all subordinate security interests as well as the
grantor of the security interest (s 133).
Þ
Þ
The proceeds of sale are distributed among
secured parties in order of priority, any residual
proceeds being payable to the grantor (s 140).
Note, also, the limitation in s 112(1), which
provides that, in exercising his or her Chapter 4
rights and remedies, “a secured party may deal
with collateral only to the same extent as the
grantor would be entitled to so deal with the
collateral”.
Þ
225
• Retention of the collateral in satisfaction of the
outstanding amount owing under the security agreement
involves the transfer of title to the secured party and the
extinguishment of all other security interests (s 134).
Recall that, for attachment purposes, a
security interest can attach to even a limited
interest enjoyed by the grantor in relation to
collateral (e.g., a life interest to certain
chattels under a trust); but it follows on
nemo dat principles that the secured party
can only acquire whatever interest the
grantor him- or herself had; thus, applying s
112(2), in enforcing its security interest
under Chapter 4, the secured party cannot
transact for the sale to a buyer of any
interest larger than the grantor’s.225
A secured party who contracts to pass a greater title than the grantor’s own will,
of course, be liable for breach of its contractual obligation to transfer clear title.
The buyer may also enjoy a statutory claim against the secured party for
damages under s 271 of the PPSA. Title-retention arrangements, however, e.g.,
conditional sales, hire-purchase agreements and finance leases, are not affected
by the s 112(1) limitation. Although the secured party’s security interest here
attaches to the grantor’s possessory interest only (ownership as a matter of form
being in the supplier/seller/lessor), the “in substance” approach of the PPSA
nevertheless treats these arrangements as outright sales coupled with a loan to
finance the purchase and a security interest in the collateral to secured
performance of the repayment obligation. In substance, then, the grantor is
treated as the owner of the collateral and thus s 112(1) does not limit the
secured party’s Chapter 4 enforcement rights. See In the matter of Maiden Civil
(P&E) Pty Ltd [2013] NSWSC 852, [78]–[79] (Brereton J).
Þ
Again, notice in the approved form must be given to
the grantor and secured parties with registered
security interests (s 135), which secured parties
may object to the proposed retention of the
collateral (s 137).
Þ
Retention by the secured party is not possible if an
objection is made (i.e., sale under s 128 is then
required): s 137(3).
Redeeming and Reinstatement:
• The PPSA provides that collateral may be “redeemed”226
(s 142) or a security agreement may be “reinstated” (s
143) at any time before disposal is exercised in relation to
the collateral.
226
227
Þ
The grantor, or indeed any other secured party,
may redeem the collateral by paying out all
outstanding amounts that are secured against the
collateral, as well as the enforcement expenses of
the enforcing secured party; the redeeming party
then becomes owner of the collateral and is
entitled to possession.227
Þ
Any person may reinstate the security agreement
by paying out the amount in arrears under the
security agreement, as well as the enforcement
expenses of the enforcing secured party; once
Not to be confused with the “equity of redemption” in mortgage arrangements
(which presupposes that the security interest is discharged through
performance).
If the NCC applies, s 103(4) of that Code also provides a (non-excludable) right
of redemption, which right will apply in conjunction with s 142 of the PPSA.
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reinstated, the relationship between the grantor and
secured parties simply continues as if the default
never occurred; the seized collateral should then
be returned to the grantor, who should in turn
continue to make the agreed payments to secured
parties.228
– a term of more than one year; or
– an indefinite term (even if determinable by any
party within one year of commencement); or
– a term up to one year that is renewable, either
automatically or at the option of one of the parties,
for one or more terms if the total of all the terms
might exceed one year; or
– a term of up to one year where the lessee or bailee,
with the consent of the lessor or bailor, in fact
retains uninterrupted (or substantially
uninterrupted) possession of the leased or bailed
property for a period of more than one year after
initially acquiring possession of the property,
A Bit More on Leases and Bailments …
• Recall that the functional definition of “security interest” in
s 12 of the PPSA picks up pre-PPSA forms of security like
mortgages and charges, but it also extends to
transactions that were not traditionally considered security
interests in personal property, such as certain lease and
bailment arrangements.
where the lessor or bailor is regularly engaged in the
business of leasing or bailing goods (and the lease or
bailment is not part of a “pooling arrangement”230).
• Section 12(2)(i) makes it clear that “a lease of goods
(whether or not a PPS lease)” — i.e., so regardless of
duration — is an example of a “security interest” if the
transaction, in substance, secures payment or
performance of an obligation, but s 12(3) then goes on
to deem “the interest of a lessor or bailor of goods under a
PPS lease” to be a “security interest”, whether or not the
transaction concerned, in substance, secures
payment or performance of an obligation.229
• So, for example, an 11-month finance lease could not be
a PPS lease under s 13, but it would be a “security
interest” under s 12 because finance leases, in
substance, secure payment or performance of an
obligation.
• However, a 13-month operating lease would not satisfy
the s 12 functional test (because such leases do not, in
substance, secure payment or performance of an
obligation), but it will be treated as if it were a security
• “PPS lease” is defined in s 13 to mean a lease or a
bailment (provided that value moves from the bailee) of
goods that is for:
228
If the NCC applies, s 89 of that Code also provides a (non-excludable) right of
reinstatement, which right will apply in conjunction with s 143 of the PPSA.
229
In Re Arcabi Pty Ltd (in liq) [2014] WASC 310, Sanderson M (at [20]) noted that several factors
have been accepted by overseas courts as indicative of a bailment arrangement that secures
payment or performance of an obligation. These include: “(a) the bailment provides that the
ownership of the goods will vest in the bailee on expiry of the bailment agreement; (b) the bailee
has an obligation to purchase the goods or an option to purchase the goods or extend the term
of the arrangement at a ‘bargain’ price such that it would be reasonable to expect the bailee to
exercise the option; (c) the term of the arrangement is for a major part of the economic life of the
goods; and (d) the minimum payments under the bailment amount to substantially all the capital
cost of the goods.”
230
See PPS Regulations 2010, reg 1.9. Basically, a pooling arrangement involves a
lease/hire arrangement where fungible equipment passes between many users
with or without the owner’s consent before being returned to the owner (e.g.,
pallets as part of the transportation of goods stored on the pallets). The
operation and legal effect of such a system is nicely illustrated in Bunnings
Group Ltd v CHEP Australia Ltd [2011] NSWCA 342.
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interest in personal property by virtue of its falling within
the s 13 definition of “PPS lease”.231
Þ
Þ
231
232
lease is a true (i.e., non-security) lease or a
security lease.
Long-term non-security leases like operating
leases, for example — and indeed long-term
bailments for value more broadly — are brought
under the PPSA regime because permitting
registration by a lessor in such arrangements not
only allows the lessor to protect his or her title
(which includes, of course, a reversionary interest
in the goods), it also protects strangers to the
lease arrangement by providing notice of the
lessor’s interest in the property while it is in the
possession of the lessee for a prolonged period
(i.e., by virtue of such prolonged possession, the
lessee is placed in a position to maintain an
outward appearance of ownership of the goods —
the “ostensible ownership” problem).232
The deeming that occurs in s 13 is also designed to
avoid disputes/litigation over whether a particular
To clarify, under a finance lease the lessee obtains the leased goods for the
duration of their useful life, and so the lessee is in substance paying the price of
the goods, coupled with a charge for the time cost of money. A finance lease is
thus in substance a loan (and is treated as such by accounting standards in
Australia). The lessee under a finance lease bears the risks and benefits
incidental to ownership even though he or she does not have legal ownership.
The lessor’s ownership of the leased goods is “nominal” in the sense that such
ownership serves only as security for payment of the rent — there is no
reversionary interest that requires securing. An operating lease, in contrast, is
for a period less than the effective life of the leased goods — so there is a
substantive reversionary interest that may warrant protection — and the owner
remains responsible for maintaining, repairing and insuring the goods (e.g., a
builder rents equipment for use on a particular job).
Short-term leases, of course, also raise ostensible ownership concerns, but it
might be considered non-cost-effective to subject them to a registration
requirement: cf Anthony Duggan and David Brown, Australian Personal Property
Securities Law (2nd ed, 2016) 79. The authors also explain (ibid 78) that an
alternative reason for the one-year-cut-off rule was to exclude short-term rentals
like car hires over the weekend: “The premise [in Ontario] was that if the rental is
a short-term one, it is less likely to be a disguised security agreement, or at least
less likely to generate litigation on that score.”
Illustrations from the case law:
• The following cases highlight the vulnerable position
that owners (and ultimately their financiers) may find
themselves in if they allow someone else to take
possession of their property (e.g., under a chattel lease
or bailment) and fail to register their interest on the
PPS Register.
– Graham v Portacom New Zealand Ltd [2004] 2 NZLR
528
•
Portacom leased five portable buildings to NDG Pine Ltd for an
indefinite period, the buildings being delivered to NDG over a fouryear period.
•
NGD granted a debenture over its assets to a bank, which debenture
was registered on the PPS Register pursuant to the NZ PPSA.
•
Portacom did not register its interest in the buildings as
lessor/owner.
•
After the bank appointed receivers and managers of NDG’s assets,
the receivers claimed that they were entitled to sell the buildings that
Portacom had supplied.
•
The receivers sought directions under the Receiverships Act and so
the Court had to decide whether the bank’s debenture created a
security interest in the buildings, and whether the security interest
attached to the buildings in terms of s 40 of the NZ PPSA (s 19 and
20 of the Australian PPSA) and took priority as a result.
•
Portacom’s argument was that as NDG only had a possessory
interest in the buildings, it could not have, under the debenture,
conferred upon the bank a right to sell the buildings.
•
Held: Portacom and NDG had entered into what, under the NZ Act
(s 17(1)(b)), would amount to a “PPS lease” in Australia, and so the
lessor was to be treated as having a security interest in the
buildings; but NDG as lessee also had sufficient rights in the
buildings to grant a security interest in them to the bank, despite
their lack of ownership — i.e., as against NGD’s secured creditors,
possession was tantamount to rights of ownership sufficient to
permit a secured creditor to acquire rights in priority to those of
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Portacom, the lessor;233 this, moreover, was a security interest in
the buildings themselves and not merely in NDG’s leasehold
interest in them; because the bank had perfected its security
interest in the buildings by registration and NDG hadn’t, the charge
created by the bank’s debenture took priority over the unperfected
“deemed” security interest of NDG; the receivers thus enjoyed the
power to sell the buildings.
•
Glamorgan’s receivers claimed that the debenture-holder, Lock, had
priority under the PPSA and they sought a court order requiring NZ
Bloodstock to surrender possession of the horse.
•
Held: Lock, the financier, who had a registered security interest over
all of Glamorgan’s, the lessee’s, “present and future assets”,
including the horse as after-acquired property, took priority over the
unregistered security interest of NZ Bloodstock, the lessor; because
Glamorgan, by virtue of its possession, had rights in the horse that it
could in law provide as security to Lock, and the lease between
Glamorgan and NZ Bloodstock was the NZ equivalent of a PPS
lease in Australia, and Lock had given value, Lock’s resultant
(deemed) security interest had attached and was enforceable
against third parties, including NZ Bloodstock; the act of earlier
registering the debenture meant that Lock’s security interest in afteracquired property attached as soon as that property was acquired,
and it was perfected by the earlier registration (thereby taking priority
over the unperfected security interest of NZ Bloodstock); regarding
the priority of competing security interests, the effect of the PPSA
was effectively to oust the nemo dat principle.
– Waller v New Zealand Bloodstock Ltd [2006] 3 NZLR
629
233
•
A thoroughbred stallion was leased by NZ Bloodstock, the horse’s
owner, to Glamorgan Farm Ltd for a term of more than one year.
•
This was a lease-to-purchase arrangement (i.e., the intention was
that Glamorgan would eventually own the horse outright) where
payment was provided in exchange for the racehorse; meantime,
however, title at all times remained with NZ Bloodstock.
•
S H Lock (NZ) Ltd held a debenture over the assets of Glamorgan,
which debenture (because it was created before the PPSA) was
registered under the Companies Act, but on the day the PPSA came
into effect, Lock registered a financing statement on the PPS
Register provided for by that Act.
•
The interest of NZ Bloodstock was deemed to be a security interest
under the NZ PPSA (i.e., the NZ equivalent of a PPS lease in
Australia) and was therefore registrable.
•
However, NZ Bloodstock had not registered its security interest at
the time the Glamorgan went into receivership.
•
Shortly beforehand, however, NZ Bloodstock had terminated its
agreement with Glamorgan and taken possession of the horse.
In the course of his judgment, Rodney Hansen J (at p 357, [28]) adopted the
following instructive passage from an article by Bridge, Macdonald, Simmonds
and Walsh, “Formalism, Functionalism and Understanding the Law of Secured
Transactions” (1999) 44 McGill Law Journal 567, 602–603: “The internal logic of
the Article 9 and PPSA priority regime is premised on a rejection of derivative
title theory in favour of registration as the principal mechanism for ranking priority
both among secured creditors and as between the secured creditor and the
debtor’s general creditors including the trustee in bankruptcy. To give effect to
this intent, ‘rights in the collateral’ must be understood as requiring a mere bare
right to possession or a power to convey a greater interest than has the debtor, a
point confirmed in PPSA jurisprudence and expressly stated in some of the more
recent PPSAs. On this interpretation, ostensible ownership — in the radical
sense of bare possession or control of the collateral — has effectively replaced
derivative title for the purposes of determining the scope of the secured debtor’s
estate at the priority level. Thus, by the very act of deeming a true lease to be a
PPSA security interest, ownership in the leased assets is effectively vested in
the lessee as against the lessee’s secured creditors and trustee in bankruptcy.”
“The result follows Parliament’s decision that the kind of leasehold
interest retained by New Zealand Bloodstock should, as a matter of
policy, be treated as a mere security interest which requires
registration to be perfected. Since that did not occur, Lock’s competing
security interest which was duly registered and so perfected took
priority. The major lessons of the case are twofold: the statutory
altering of the proprietary rights of a lessor; and the crucial importance
of registration. These are policy choices which have been made and
significantly alter what would otherwise have been the position.”
Baragwanath and Robertson JJ [75]
– Rabobank New Zealand Ltd v McAnulty [2011] 3
NZLR 192
•
The owners (a syndicate) of a racing stallion bailed the animal to a
commercial stud farm, which the owners paid to provide services
such as managing the servicing of mares by the stallion, the
collection of fees on their behalf, and generally providing for the
stallion’s day-to-day care.
•
Although the stud farm became a bailee of the stallion, no rent was
paid to the owners — a portion of the service fees earned by the
stallion was paid to the farm.
•
Rabobank later registered a security interest in relation to all of the
stud farm’s present and after-acquired property in exchange for
finance, but the owners did not register a financing statement.
•
When the stud farm defaulted on its obligations to Rabobank,
Rabobank appointed receivers and claimed an interest in the stallion
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(as part of the bank’s collateral) ahead of the owners because the
bank had perfected its security interest whereas the owners had
failed to register a financing statement in relation to any deemed
security interest arising from the bailment of the horse.
•
QES and its financiers, Westpac and Esanda, did not register their
interests in the vehicles on the Northern Territory register of motor
vehicles, and they also failed to register their interests on the PPS
Register following the registration commencement date.
•
The owners replied that its interest in the stallion was not a security
interest and so the Act’s priority rules did not apply.
•
Between 2010 and 2012, Maiden made payments to QES under the
lease and maintained possession of the vehicles.
•
The Court had to decide whether the agreement between the
owners and the stud farm constituted the NZ equivalent of a PPS
lease in Australia.
•
•
Held: The owners’ argument prevailed: the bailment, although
exceeding one year, did not constitute the NZ equivalent of a PPS
lease in Australia and so the NZ PPSA priority rules did not apply;
the owners of the stallion were not “regularly in the business of
bailing goods”, but, rather, were in the business of maintaining and
profiting from their stallion (the cost of standing the horse was an
incidental expense to that business, not the business itself); to be in
the business of bailing goods, an owner would have to receive, or
intend to receive, payment, or some other form of value, with a view
to making a profit from the bailment (i.e., gratuitous bailments are
excluded, as are cases where the bailee is in the business of
bailments rather than the bailor), which requirement ensures that the
lease/bailment transactions that are not easily distinguishable from
finance leases are treated as if they were finance leases; here,
however, the bailee obtained possession of the stallion but did not
pay for that possession; rather, the bailee was paid by the bailor to
carry out services in relation to the animal; hence, it could not be
said that the owners profited, or intended to profit, from the bailment;
the Court observed that the wording of the Australian PPSA was
clearer in excluding such arrangements from the definition of a PPS
lease; the Court also observed that the reference in the Act to the
lessor or bailor being “regularly in the business of” contemplated a
series of leasing transactions and excluded single, isolated
transactions; where the first transaction is followed by others,
however, it may be that the first transaction is “regular”, as it is the
start of the regular engagement in the business.
In May 2012, Maiden entered into a facility arrangement with Fast
Financial Solutions Pty Ltd (Fast) to finance the lease and, for the
purposes of securing the advances made under that facility, Maiden
signed a general security agreement (GSA) in favour of Fast,
granting a security interest in relation to all of its assets, including its
interest in the Caterpillar vehicles (one of which, by that stage, was
actually owned by Maiden, as Maiden had paid out QES in relation
to one of the machines).
•
Fast perfected it security interest under the GSA by registration on
the PPS Register.
•
In July 2012, Fast learned of a number of events of default under the
GSA and took steps to enforce their security under that agreement
(rather than under Chapter 4 of the PPSA); in particular, they
appointed receivers and managers to all of Maiden’s assets,
including the Caterpillar vehicles.
•
Maiden then went into voluntary liquidation, i.e., before the lease
period had ended and with amounts still owing in relation to two of
the vehicles.
– In the matter of Maiden Civil (P&E) Pty Ltd [2013]
NSWSC 852
•
In 2010, Westpac and Esanda financed the lessor, Queensland
Excavation Services Pty Ltd (QES), to purchase three Caterpillar
civil construction vehicles.
•
The vehicles were then leased by QES to Maiden Civil (P&E) Pty Ltd
(Maiden) for civil construction work in the Northern Territory. (This
was before the PPS Register registration commencement date of 30
January 2012).
234
•
Maiden’s liquidator demanded possession of the vehicles.
•
QES, in reply, asserted legal title (ownership) over the vehicles.
•
Accordingly, the Court had to decide who, as between Maiden and
QES, was entitled to the vehicles.
•
Held: That, by virtue of the deeming in s 13 of the PPSA, QES had a
“security interest” in the caterpillars as the lessor under a PPS lease
(under an earlier definition of PPS lease in the Act, which definition
included a lease of serial-numbered goods for more than 90 days);
Fast had a competing security interest in the same equipment
pursuant to the GSA.
•
Consistent with the policy of the PPSA (both in Australia and
elsewhere),234 QES’s and Fast’s competing security interests had to
be resolved according to the priority principles established by the
Act; the dispute could not be resolved through a determination of
who had “title” to the collateral, because the dispute is one of
priority, not ownership.
Brereton J (at [32]) states: “The Commonwealth Parliament, in enacting
legislation that was modelled on the New Zealand and Canadian legislation,
should be taken to have intended the same approach, which was by then wellestablished in Canada and New Zealand, to apply.”
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“The competing security interests of QES and Fast must … be
resolved according to the system of priorities established by the
PPSA. The … dispute cannot be resolved through the determination
of who has title to the collateral, because the dispute is one of
priority, not ownership. … [A] person with an interest rooted in title to
property in the possession of another, once perfected, can, in the
event of default by the debtor, look to the property ahead of all others
to satisfy his claim; but if that interest is not perfected, it is vulnerable,
even though rooted in title to the goods, because a third party may
derive an interest in the same goods by virtue of some dealing with
the person in possession of them, and may become entitled to
priority, ahead of the person holding the unperfected security
interest, to look to the goods to satisfy a claim.”
Brereton J [35]
•
Accordingly, s 55(3) of the PPSA relevantly provided that Fast’s
perfected security interest in the vehicles had priority over a QES’s
unperfected security interest in them, notwithstanding that QES was
legal owner — under the clear rules of the Act, Fast’s security
interest beat QES’s legal title.
•
Moreover, upon Maiden going into administration, QES’s
unperfected security interest vested in Maiden pursuant to s 267 of
the PPSA and therefore Maiden became entitled to the Caterpillars,
subject to the perfected security interest of Fast.
– the unperfected interests would vest in Arcabi upon the
appointment of liquidators (s 267 PPSA); and
– Westpac would be entitled to priority to the stored and
consignment goods over the customers pursuant to its
perfected security interest (s 55(3) PPSA).
•
1. Bailment: Was the storage arrangement between Arcabi and
its customers a bailment that required registration?
2. Consignment: Was the consignment arrangement subject to
the PPSA?
3. Indemnity and lien: Were the receivers entitled to claim an
indemnity, secured by an equitable lien over Arcabi’s and the
customers’ goods, for their costs in investigating and
preserving Arcabi’s business and progressing matters to the
point where they could separate the goods of Arcabi from those
of its customers, even though those goods were not
necessarily subject to Westpac’s security?
•
Held: Neither the storage (goods held on bailment) nor the
consignment arrangements were subject to the PPSA and the
receivers were entitled to an indemnity from and lien over the assets
stored with Arcabi.
•
As for bailment, a bailment arrangement can amount to a “security
interest” capable of perfection by registration where it, in substance,
secures payment or performance or an obligation (s 12(1)), or it falls
within the meaning of a “PPS Lease” in s 13 of the Act (s 12(3)(c)).
– Re Arcabi Pty Ltd (Receivers & Managers Appointed)
(in liquidation) [2014] WASC 310
•
Arcabi operated a business of storing and selling rare coins and
bank notes for its customers.
•
Much of the property stored on Arcabi’s premises was not owned by
the company — it was either stored for safekeeping in return for a
storage fee or else held by Arcabi for the purpose of sale on
consignment.
•
Receivers and liquidators were appointed to the assets and
undertakings of Arcabi by Westpac, and the receivers formed the
view that because the storage and consignment arrangements were
not “security interests” under the PPSA, the goods could be returned
to the relevant owners; the receivers had undertaken extensive
investigations in order to ascertain which inventory was owned by
Arcabi and what was owned by third parties.
•
Accordingly, the receivers sought directions from the Court to clarify
the following issues arising from the PPSA:
However, the receivers were worried that the arrangements between
Arcabi and its customers might well bring the customers’ goods
within the scope of the PPSA, which would mean that:
– the customers’ security interest in the collateral — the stored
and consignment goods — would not have been perfected by
registration (s 21 PPSA);
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Þ The storage arrangements did not secure payment or
performance of an obligation, and so were not subject to the
PPSA for that reason: the goods would not vest in Arcabi on
the expiry of the bailment; the company did not have an
obligation to purchase the goods; the term of the arrangement
was not likely to be for the major part of the economic life of the
goods; and the nominal payment made by the baileecustomers for the bailment did not equate to the capital costs of
the goods.
Þ What is more, the bailment arrangement did not constitute a
“PPS Lease” either; a bailment will be deemed a “PPS Lease”
under s 13 if: it is for a term of more than one year, or is for an
indefinite term, or for a term of up to one year that is
automatically renewable or renewed at the option of one of the
parties; the bailor is regularly engaged in the business of
bailing goods; and the bailee provides value for possession of
the underlying collateral. Following Rabobank New Zealand Ltd
v McAnulty, there was no “PPS Lease”, as the customers of
Arcabi were not “regularly engaged in the business of bailing
goods” (most of them, rather, were hobbyists) — but even if the
customers of the stored goods did operate a business, they
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(much like the stallion owners in Rabobank) would have been
in the business of profiting from the exchange of rare coins or
bank notes rather than from the bailment.
•
As for consignment, the PPSA would apply if a consignment
arrangement either, in substance, secured payment or performance
of an obligation (s 12(2)(h)) or was a “commercial consignment” (as
defined in s 10 of the PPSA)235 for the purposes of being a deemed
security interest under s 13(3)(b) of the PPSA.
Þ However, the consignment arrangement here did not secure
performance of an obligation, as Arcabi owed no relevant
obligation to its customers — it was only obliged to pay
customers if and when the goods were sold to a third-party
purchaser, at which time title would pass to the third party —
until then, the customers were simply entitled to take back the
consigned goods.
Þ Nor was it a “commercial consignment” under the PPSA, as
Arcabi and its customers did not deal in rare coins and bank
notes “in the ordinary course of business” — the statutory
requirement that “the consignor and the consignee both deal in
goods of that kind in the ordinary course of business” basically
limits the automatic application of the PPSA to situations where
the consignment is used as a means of financing the
acquisition of trading stock, and, again, most of Acarbi’s
customers were hobbyists; moreover, Arcabi was generally
known to its creditors as being in the business of selling the
goods of others — a fact confirmed by a questionnaire that the
receivers had administered to Acarbi’s consignment creditors
— hence, the arrangement fell within an exception to
“commercial consignment” as defined by s 10 of the PPSA.
Þ On indemnity and lien: The receivers were entitled to assert an
indemnity, secured by an equitable lien over the assets stored with
Arcabi (regardless of ownership), for the considerable work they had
done to identify and distinguish that property from the property over
which they were appointed; this extended to costs and expenses
incurred in the preservation of the assets, even if not all of the assets
belonged to the company (e.g., insuring the goods while the
receivers’ extensive investigations were underway).
235
Section 10 defines “commercial consignment” as a consignment where “(a) the
consignor retains an interest in goods that the consignor delivers to the
consignee; and (b) the consignor delivers the goods to the consignee for the
purposes of sale, lease or other disposal; and (c) the consignor and the
consignee both deal in goods of that kind in the ordinary course of business; but
does not include an agreement under which the goods are delivered to: (d) an
auctioneer for the purpose of sale; or (e) a consignee for sale, lease or other
disposal if the consignee is generally known to creditors of the consignee to be
selling or leasing goods for others”.
Special Rules for Particular Types of Property
• The PPSA, Chapter 3, contains a number of special rules
relating to accessions, commingled goods, proceeds,
agricultural interests and intellectual property. (We will
only deal, again briefly, with the first three property-types
mentioned.)
• Accessions:
Þ “Accession to other goods” is defined in s 10 of
the PPSA as “goods that are installed in, or affixed
to, the other goods, unless both the accession and
the other goods are required or permitted by the
regulations to be described by serial number”.
Þ By s 88 of the Act, a security interest in goods that
subsequently become an accession to other goods
continues in the accession.
Þ Parties with security interests in the goods at the
time of their accession to other goods take priority
over a party with a security interest in the whole (s
89), provided those interests were perfected first: s
90.
Þ Section 91 is concerned with the situation where the
security interest in the accession attached after they
were attached to the principal chattel; here the
security interest in the accession is subordinated
to: (i) the interest of a person who had an interest in
the principal chattel when the disputed goods were
attached and who did not consent to the security
interest in the accession, or disclaim an interest in
the accession, or agree to its removal (s 91(a)); or
(ii) the interest of a person who acquired an interest
in the principal chattel (e.g., by purchasing it) after
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the goods became an accession, but before the
security interest in the accession was perfected.
Þ Priority disputes in relation to perfected security
interests continuing in processed or commingled
goods are resolved by reference to the ratio that the
obligation secured by the perfected security interest
bears to the sum of the obligations secured by all
perfected security interests in the same product or
mass (s 102(2)), but the obligation secured by a
security interest cannot exceed the value of the
goods on the day on which the goods became part
of the product or mass: s 102(4).
Þ Rules are also provided for the removal of the
accession from the principal chattel by a secured
party who is entitled to seize the collateral under s
123, and for reimbursement for any damage done
to the principal chattel as a result of such removal:
ss 92–97.
• Commingled, processed (etc.) goods:
Þ Under s 10 of the PPSA, goods that are
“commingled” include “goods that are mixed with
goods of the same kind”.
• Proceeds:
Þ Proceeds are a form of property that is identifiable
or traceable (whether or not there is a fiduciary
relationship between the secured party and the
grantor) from another piece or pieces of property: s
31 (e.g., sale proceeds, an insurance payout).
Þ Under s 99 of the Act, a security interest in goods
that subsequently become part of a product or
mass is deemed automatically236 to continue in the
product or mass if the component goods are so
manufactured, processed, assembled or
commingled that their identity is lost in the product
or mass, “lost” meaning that it is not commercially
practical to restore the component goods to their
original state (hence the difference from the concept
of “accession”, above, which presupposes the
possibility of removal without excessive damage to
either the accession or the principal asset).
Þ Moreover, for the purposes of the default priority
rules under the Act (s 55), perfection of a security
interest in goods that subsequently become part of a
product or mass achieves perfection of the security
interest in the product or the mass as well (s 100),
but any priority enjoyed is limited to the value of the
goods on the day on which they became part of the
product or mass: s 101.
236
I.e., no aggregation clause is required in the supply contract.
“‘[I]dentifable’ refers to the ability to point to the particular
property obtained by the debtor as a result of the dealing with
the collateral (or proceeds), while ‘traceable’ refers to the
situation where the collateral is [mixed] with other property so
that its identity is lost.”237
Þ A security interest in particular collateral attaches to
proceeds of that collateral,238 unless the security
agreement provides otherwise: s 32.
Þ A security interest in the proceeds will be perfected
by registration if the proceeds are described in the
financing statement or consist of money (currency, a
237
238
R Cuming, C Walsh and R Wood, Personal Property Security Law (2nd ed,
2012) 567.
It also continues in the collateral unless the secured party expressly or impliedly
authorized a disposal giving rise to the proceeds, or expressly or impliedly
agreed that a dealing giving rise to the proceeds would extinguish the security
interest, in which case it will only continue in the proceeds: s 32(1)(a)(i) and (ii).
236
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237
lOMoARcPSD|3076807
cheque or a bank account) or a right to and
insurance payment: s 33(1).
Þ If the collateral is described in the financing
statement as “all present and after-acquired
property” (i.e., the PPSA equivalent to a
floating charge), then this will include any
proceeds: PPS Regulations 2010, Sch 1, Pt
2.4.
Þ For the purposes the Act’s default priority rules (s
55), the time of registration or possession in relation
to the original collateral, or the time of perfection of a
security interest in the original collateral, is deemed
to be time of registration, possession or perfection in
relation to the proceeds of the original collateral: s
32(5).
Þ If, however, the grantor is insolvent, and the
proceeds are paid into a bank account and
the bank holds a general security interest
over the assets of the customer, then the
bank will take priority over other secured
parties by virtue of its “controlling” the bank
account: cf. ss 57(1), (2A), 75.
* * * * * * * *
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