lOMoARcPSD|3076807 Supplementary Property Notes by Richard Bigwood UQ Real Property LLB301 (Queensland University of Technology) StuDocu is not sponsored or endorsed by any college or university Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) lOMoARcPSD|3076807 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PERSONAL PROPERTY Chattels Real Chattels Personal • e.g. leasehold interests in land For study purposes only * NOT FOR CITATION * Choses in possession Choses in action 1 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) lOMoARcPSD|3076807 Personal Property: Basic Taxonomy “Interests”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). 2 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 3 lOMoARcPSD|3076807 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. 4 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 5 lOMoARcPSD|3076807 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). 6 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 7 lOMoARcPSD|3076807 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. 8 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 9 lOMoARcPSD|3076807 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. 10 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 11 lOMoARcPSD|3076807 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. 12 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 13 lOMoARcPSD|3076807 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 14 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 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. 15 lOMoARcPSD|3076807 • 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. 16 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 17 lOMoARcPSD|3076807 • 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. 18 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 19 lOMoARcPSD|3076807 • 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)). 20 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 21 lOMoARcPSD|3076807 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). 22 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 23 lOMoARcPSD|3076807 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. 24 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 25 lOMoARcPSD|3076807 • 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). 26 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 27 lOMoARcPSD|3076807 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 28 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 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). 29 lOMoARcPSD|3076807 • 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.” 30 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 31 lOMoARcPSD|3076807 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. 32 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 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 33 lOMoARcPSD|3076807 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 34 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 35 lOMoARcPSD|3076807 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. 36 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 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 37 lOMoARcPSD|3076807 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: 38 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 39 lOMoARcPSD|3076807 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. 40 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 41 lOMoARcPSD|3076807 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. 42 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 43 lOMoARcPSD|3076807 - 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. 44 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 45 lOMoARcPSD|3076807 • • 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. 46 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) - 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); 47 lOMoARcPSD|3076807 - 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]. 48 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 49 lOMoARcPSD|3076807 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”). 50 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 51 lOMoARcPSD|3076807 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. 52 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) - 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 53 lOMoARcPSD|3076807 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 54 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 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 55 lOMoARcPSD|3076807 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 56 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) • 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. 57 lOMoARcPSD|3076807 • - 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! 58 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 59 lOMoARcPSD|3076807 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. 60 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 61 lOMoARcPSD|3076807 - 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. 62 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 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). 63 lOMoARcPSD|3076807 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 64 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) “[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! 65 lOMoARcPSD|3076807 • 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. 66 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 67 lOMoARcPSD|3076807 - 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 68 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 69 lOMoARcPSD|3076807 • 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. 70 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 71 lOMoARcPSD|3076807 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 72 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 73 lOMoARcPSD|3076807 • • 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). 74 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 75 lOMoARcPSD|3076807 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. 76 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 77 lOMoARcPSD|3076807 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 78 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) • 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). 79 lOMoARcPSD|3076807 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. 80 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 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 81 lOMoARcPSD|3076807 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. 82 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) “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. * * * * * * 83 lOMoARcPSD|3076807 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. 84 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 85 lOMoARcPSD|3076807 “… 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. 86 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) • 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 87 lOMoARcPSD|3076807 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. 88 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 89 lOMoARcPSD|3076807 • 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). 90 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 91 lOMoARcPSD|3076807 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). 92 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 93 lOMoARcPSD|3076807 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. 94 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 95 lOMoARcPSD|3076807 - 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: 96 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 97 lOMoARcPSD|3076807 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”). 98 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) - 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. * * * * * * * 99 lOMoARcPSD|3076807 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. 100 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) • 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 101 lOMoARcPSD|3076807 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 • 102 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) See Morris v Martin & Sons (above) 103 lOMoARcPSD|3076807 • 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). 104 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 105 lOMoARcPSD|3076807 • 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 106 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 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. 107 lOMoARcPSD|3076807 • 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. 108 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 109 lOMoARcPSD|3076807 • 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). 110 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 111 lOMoARcPSD|3076807 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. 112 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 113 lOMoARcPSD|3076807 – 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). 114 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 115 lOMoARcPSD|3076807 • 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”. 116 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 117 lOMoARcPSD|3076807 • 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. 118 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) • 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. 119 lOMoARcPSD|3076807 • 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. 120 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) • 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.” 121 lOMoARcPSD|3076807 • 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 122 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 123 lOMoARcPSD|3076807 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. 124 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 125 lOMoARcPSD|3076807 • 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. 126 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 127 lOMoARcPSD|3076807 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) 128 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) • 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). 129 lOMoARcPSD|3076807 • 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. 130 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 131 lOMoARcPSD|3076807 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”. 132 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 133 lOMoARcPSD|3076807 – 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.” 134 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 135 lOMoARcPSD|3076807 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 136 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 137 lOMoARcPSD|3076807 – 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 138 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 139 lOMoARcPSD|3076807 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. 140 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 141 lOMoARcPSD|3076807 (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. 142 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 143 lOMoARcPSD|3076807 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. 144 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 145 lOMoARcPSD|3076807 • 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. 146 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 147 lOMoARcPSD|3076807 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 148 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) E.g., selling agents like brokers and auctioneers, retail sellers and car dealers, antique dealers. 149 lOMoARcPSD|3076807 • 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. 150 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 151 lOMoARcPSD|3076807 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. 152 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 153 lOMoARcPSD|3076807 • 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 154 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 155 lOMoARcPSD|3076807 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. 156 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 157 lOMoARcPSD|3076807 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. 158 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 159 lOMoARcPSD|3076807 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 160 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 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). 161 lOMoARcPSD|3076807 • 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. 162 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 163 lOMoARcPSD|3076807 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. 164 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 165 lOMoARcPSD|3076807 • 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). 166 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 167 lOMoARcPSD|3076807 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. 168 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 169 lOMoARcPSD|3076807 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. 170 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 171 lOMoARcPSD|3076807 (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. 172 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 173 lOMoARcPSD|3076807 • 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. 174 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) • 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, 175 lOMoARcPSD|3076807 – 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. 176 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 177 lOMoARcPSD|3076807 (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 178 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 179 lOMoARcPSD|3076807 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). 180 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) • 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 181 lOMoARcPSD|3076807 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. 182 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 183 lOMoARcPSD|3076807 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. 184 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 185 lOMoARcPSD|3076807 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). 186 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 187 lOMoARcPSD|3076807 (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”) 188 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 189 lOMoARcPSD|3076807 • 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. 190 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 191 lOMoARcPSD|3076807 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. 192 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 193 lOMoARcPSD|3076807 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). 194 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 195 lOMoARcPSD|3076807 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. 196 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 197 lOMoARcPSD|3076807 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 186 187 198 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 199 lOMoARcPSD|3076807 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 200 201 189 190 191 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) lOMoARcPSD|3076807 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. 202 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 203 lOMoARcPSD|3076807 • 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). 204 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 205 lOMoARcPSD|3076807 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 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 207 lOMoARcPSD|3076807 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 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 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 lOMoARcPSD|3076807 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 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 211 lOMoARcPSD|3076807 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 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 213 lOMoARcPSD|3076807 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 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 215 lOMoARcPSD|3076807 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 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 217 lOMoARcPSD|3076807 • 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 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 219 lOMoARcPSD|3076807 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 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 221 lOMoARcPSD|3076807 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. 222 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 223 lOMoARcPSD|3076807 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. 224 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 225 lOMoARcPSD|3076807 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 226 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 227 lOMoARcPSD|3076807 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 228 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 229 lOMoARcPSD|3076807 (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.” 230 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 231 lOMoARcPSD|3076807 “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); 232 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 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 233 lOMoARcPSD|3076807 (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 234 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 235 lOMoARcPSD|3076807 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 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com) 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. * * * * * * * * 238 Downloaded by Mojtaba Dani (mojtaba.dani@gmail.com)