This article briefly explains the legal position where goods are sold by a non-owner and how that position can differ depending on the situation.
Introduction
The basic rule of law is that you cannot sell what you do not own. That means, of course, that you cannot buy from a non-owner either.
There is always a loser when goods are sold by a person who does not have the authority to sell. It is either the original owner, who loses their property, or, more often, the good faith buyer, who loses their money when the items are returned.
The law in this area can be confusing and hard to understand. This article briefly explains the legal position where goods are sold by a non-owner and how that position can differ depending on the situation.
An example of items that might be sold by someone other than the owner, is stolen goods, but there are many other examples, including a landlord selling possessions of a tenant who has vacated, a parent selling the possessions of a child, or a non-licensed reseller of electronically downloaded products.
The general rule: protecting the original owner
The general rule where goods are sold by a non-owner is that the eventual purchaser does not gain good title.
This means that if B wrongly sells goods belonging to A to a buyer called C, the items remain the property of A. The fact that C has entirely innocently purchased items that he believed were owned by B is irrelevant. It is logical to protect the original owner's title.
Despite this, there are numerous exceptions that have arisen as a result of the obvious unfairness the general rule might create where innocent buyers lose their money in difficult circumstances.
Exceptions to the General Rule
Estoppel
Estoppel essentially refers to a situation where someone is prevented by law from enforcing a particular right. In this context, estoppel works to prevent an original owner from claiming ownership over items that have been wrongfully sold by a third party.
There are two ways in which estoppel can be relied upon by an innocent buyer: estoppel by representation and estoppel by negligence.
Where the true owner has represented that the purported seller is in fact the true owner of the goods, the law says they are estopped from later saying differently, that is, that they were joking, or spoke in error. They cannot say one thing on one day and another thing later.
So, if the true owner indicates to the end buyer that the seller has the authority to perform the sale, the end buyer will gain good title. This is despite the fact that the seller does not in fact have the authority to sell the goods.
So, even if the purported seller has no agreement from the true owner to sell (such as a sales agency agreement), if the true owners says 'Yes, you can buy from this guy', then the buyer receives good title.
Estoppel by negligence applies where the original owner has not taken sufficient care to ensure that his belongings or stock are not sold by a rogue third party.
Common examples of this include cases where the original owner fails to take steps to register their title over goods, e.g. by informing the relevant authorities.
This exception has been, however, interpreted very restrictively by courts in the past. Judges are highly reluctant to remove title away from people who are even extremely careless with their own property. In one case, for example, it was found that the victim of a vehicle theft could recover his property under the general rule even though he failed to report the theft to the police.
Agency
An agency relationship exists if a person has the consent of the owner to possess his goods as a 'mercantile agent'. This includes business arrangements where commercial agents are entrusted to make certain decisions concerning property on behalf of a principal.
If a person is in possession of goods, with the consent of the owner, as a mercantile agent, any sale by that person is valid even if the owner does not provide express authorisation for the sale. This means that an innocent purchaser can gain good title to the items if wrongfully sold by the agent.
Examples of agents passing good title to buyers include car dealership scenarios, where the owner of a vehicle gives his consent to a dealer to try and sell the car on his behalf. The owner does not have to be consulted on the particular sale for the transaction to be valid.
Importantly, this exemption continues to apply where the agent's authority to possess goods has ended. The purchaser is still protected if he is not aware that the agency relationship has come to an end. This exemption, therefore, is much wider than the estoppel circumstances highlighted above.
Seller in possession after sale
If a seller, with the consent of the buyer, remains in possession of goods after the sale has taken place and goes on to make a further sale of the same items, the final purchaser will gain a good title providing he had no knowledge of the original sale.
Essentially: the most recent sale takes precedence over any earlier sale.
An important example of this is a hire purchase arrangement. While a hire purchase agreement is valid, the finance company owns, for example, a car. But if the finance company terminates the agreement, or simply allows it to expire in normal circumstances, but fails to pick up the car, then theoretically, the HP user of the car is free to sell it.
Although this is not a rare happening, the application of the law may be different in apparently similar circumstances. For example, there is no hard and fast rule as to how long the finance company must have neglected to pick up their car before a buy can obtain good title from a debtor in possession.
A further question arises as to the ownership of the money received for the sale. Strictly that would belong to the finance company. So these circumstances generally arise only in a situation of fraud and / or theft.
Buyer in possession after payment by cheque
As an example:
B agrees to purchase stock for his business, pays by cheque, and takes possession with the consent of the seller. B then goes on to re-sell the items before their cheque has cleared. Their buyer will acquire good title even if the cheque bounces.
Market overt
There used to be another ancient exception called market overt, which had been in place for over 700 years. The word 'overt' comes from the French 'ouvert' meaning open. The law was that the title to a good sold at a market in good faith would transfer to the buyer if the market was established, public, open to everyone and operated during daylight hours. However, this law, known for good reasons as the 'thieves charter', was abolished in 1995.
However, even twenty years later, some sellers, where the provenance of the goods is not clear, may cite this law as a justification for sale and a reason why they are not responsible for helping an owner re-acquire his or her possessions.
The legal position is still that the seller had no title, so prima facie, the buyer has no title.
Auctions
Many stolen goods are sold at auction. This gives the seller some anonymity.
The Sale of Goods Act 1979 refers to auction sales in Section 57 only as far as the formation of the contract is concerned. The buyer enters into a contract with the owner of the goods and not the auctioneer. The auctioneer is simply an agent.
The position of the auctioneers depends on what they knew. Of course, if pressed, they will say they knew nothing. That is probably true.
If the auctioneers are presented with evidence of true ownership, they should disclose the whereabouts of the goods. They could certainly be made to disclose under a court order, but that would be expensive to enforce.
The threat of a claim is often enough to provoke an auctioneer into disclosing the details of the buyer. Certainly it should be easier if there is proof of real ownership, such as a police report or a court order. It would be perverting the course of justice if the auctioneer refused.
Additionally, an auction house will not want a reputation for handling stolen goods. A quiet telephone call or e-mail message mentioning the power of social networks and relevant blogs should work wonders.
Summary
In the past courts have been reluctant to find one way or the other in sale by a non-owner cases. To borrow a phrase, there really is 'no right answer' in these situations. Either way, one party will lose out through no fault of their own. This is why the law has developed so many exceptions and caveats to the general rule.
The legal position when goods are sold by a non-owner can be summed up with the following points:
The starting point is that a person who does not have good title to goods cannot pass on good title - the original owner is protected.
If the original owner indicates that the seller does in fact have good title, or if he is careless to that possibility, the end purchaser usually gains good title.
If a 'mercantile agent' possesses goods with the consent of the owner and sells them on without the express authority of the owner, the end purchaser gains good title.
Where a seller remains in possession of goods with the consent of the buyer after the sale and goes on to re-sell them, the end purchaser gains good title if he had no knowledge of the original sale.
Where a person agrees to purchase goods, takes possession of them with the consent of the seller and goes on to re-sell them before the original sale has been completed, the end purchaser gains good title if he had no knowledge of the original agreement.
Useful documents
If you are the buyer, the best way of ensuring that title passes to you is to record the transaction in a legal contract where the seller promises that they are either the owner of the goods or have the right to sell them. If they break the warranty by selling stock whose title doesn't pass to the buyer, they can be sued for damages. You can read an explanation about how warranties work in relation to selling a business.
If you are a distributor or agent, or selling via one, you may be interested in our sales agency contracts and distribution agreements.