Changes Proposed to Bring Transfer of Ownership Rules for Prepaid Consumer Goods into 21st Century

The Law Commission has launched a consultation on draft legislation to reform the rules which determine when ownership of prepaid goods is transferred from a trader to a consumer.

The draft legislation aims to enhance protection for consumers who may otherwise lose out where they have prepaid for goods and the seller subsequently becomes insolvent, especially as consumers are now more often paying for goods in advance of receiving them – for example, when purchasing products in-store which will be delivered at a later date or when shopping online.

Proposed Changes

The draft legislation categorises goods into two groups and sets out transfer of ownership rules for each group as follows:

1. Goods identified and agreed on at the time the sales contract is made

For example, where items have been selected and purchased in-store or where a specific, one of a kind item (such as an antique) has been bought online.

Where goods are identified and agreed on at the time the sales contract is entered into, ownership of those goods will pass to the consumer at the time the contract is formed. This means that the consumer will own the goods even if the consumer does not take the product away with them on the day of purchase.

2. Goods not identified and agreed on at the time the sales contract is made

For example, goods which are bought online according to a generic description and goods which a consumer has ordered but are yet to be manufactured to the consumer’s specification.

Where specific goods are not identified and agreed on at the time the sales contract is made, ownership of such goods will transfer when the first of the following events occurs:

1. the goods are labelled with the consumer’s name in a way that is intended by the trader to be permanent;
2. the goods have been set aside for the consumer in a way that is intended to be permanent;
3. the goods have been altered to a specification agreed between the consumer and the trader;
4. the consumer is told that goods bearing a unique identifier will be used to fulfil the contract;
5. manufacture of the goods is completed, if the goods are to be manufactured to a specification agreed between the consumer and the trader;
6. the consumer examines the goods and agrees they are to be used to fulfil the contract;
7. the goods are delivered to a courier for delivery to the consumer;
8. the goods are delivered to the consumer; or
9. the goods are identified in some other way by the trader, and the trader intends the identification to be permanent.

Contract Formation

The Law Commission is also seeking evidence regarding the use and impact of terms and conditions by traders which state that a sales contract does not form until the goods are “dispatched” to the consumer.

The law governing the sale of goods is based on a contract being in place between the buyer and the seller, and the draft legislation proposes that ownership of specific goods should transfer at the time the contract is made and ownership of unascertained, more generic goods, should transfer when goods are identified for fulfilment of the contract. However, it is common practice for online traders to seek to delay the formation of the sales contract beyond this point, until the goods have been “dispatched” to the consumer, in order to protect the trader against being contractually obliged to honour orders which have been received when an item is out of stock or when the item has been accidentally mispriced.

The Law Commission has picked up on this practice as being potentially unfair to consumers because the consumer’s right to delivery of goods, as well as the ownership rights proposed under the draft legislation, do not apply unless a sales contract has been formed. Delaying the formation of the contract until dispatch therefore has the potential to deprive consumers of their statutory rights and may undermine the proposed legislation.

Current Law

The current law is complex and old-fashioned as it has been largely unchanged since the 19^th century. It sets out that ownership of goods will generally transfer to the consumer when the parties to the contract intend it to pass, which depends on the terms of the contract, the conduct of the parties and the circumstances of the case (Section 17 of the Sale of Goods Act 1979). A number of rebuttable presumptions regarding the transfer of ownership of goods are also set out in Section 18 of the Sale of Goods Act 1979, further increasing consumer confusion as to when they own goods which they have prepaid for.

As well as being difficult to understand, a further issue under the existing laws is that if a company becomes insolvent but goods prepaid for are still in its possession, those goods may be considered as assets belonging to the business and may be used by administrators to pay off the company’s debts.

Conclusion

The aim of the proposed legislation is to modernise and simplify the law, offering consumers greater protection when a trader becomes insolvent in the form of ownership rights early on in the contracting process. It is not imagined that these proposals will have a significant impact on traders as the changes will mainly apply to insolvency situations, however, an adjustment to standard terms and conditions may be required if the proposals become law.

The consultation is open until 31 October 2020 and responses can be submitted here.

If you have any questions about this proposal or if you need any advice in relation to consumer terms and conditions, please contact a member of our Commercial team.