I. INTRODUCTION

5.1 Section 16(3) of the Sale of Goods Act 1923 (NSW) provides:

Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, or where the contract is for specific goods the property in which has passed to the buyer, the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty and not as a ground for rejecting the goods and treating the contract as repudiated, unless there be a term of the contract express or implied to that effect.

There are two limbs to this provision. Under the first limb “acceptance”¹ of goods has the effect that breach of condition may only be treated as a breach of warranty. Under the second limb, the passing of property in specific goods has this effect. In either case the buyer may claim damages in respect of the seller’s breach, but the buyer’s remedy of rejection of the goods is barred unless there is a term in the contract, express or implied, preserving the remedy.

5.2 The terms of s 16(3) are derived from s11(1)(c) of the Sale of Goods Act 1893 (UK).² That provision was, it would seem,³ based on the law stated in two decisions: Street v Blay⁴ and Behn v Burness.⁵

5.3 In Street v Blay the plaintiff sued in assumpsit to recover the price of a horse “warranted sound” which had been sold to the defendant. The defence was that the horse had been unsound and the contract consequently “rescinded” by the defendant. To this the plaintiff replied that the right of rescission had been lost by the defendant’s sale of the horse to a third party. The jury having found for the defendant, a rule nisi was obtained by the plaintiff which was made absolute by the court thereby effectively reversing the verdict. Lord Tenterden CJ reasoned⁶ that once property in a specific chattel has passed to a buyer, the buyer is unable by a unilateral act to revest property in the seller, so that in the instant case the defendant could not revest title without the consent of the seller even though he had repurchased the horse from the third party. In addition it was said that once the buyer had exercised dominion over goods the subject of the contract, the buyer was unable to return them. Thus, in the present case the defendant had dealt with the horse-and so accepted the goods-by selling it to the third person. A further rationale was given, namely, that as the defendant had derived “an intermediate benefit as a consequence of the bargain, which he would still retain”, the parties could not be placed in their pre-contractual position by rejection of the goods.

5.4 Behn v Burness was a decision of the Exchequer Chamber on a charter party contract, but the judgment of the court (delivered by Williams J) was regarded in the nineteenth century as an authoritative statement of the law on conditions and warranties. His Lordship said:

Accordingly, if a specific thing has been sold, with a warranty of its quality, under such circumstances that the property passes by the sale, the vendee having thus benefited by the partial execution of the contract, and become the proprietor of the thing sold, cannot treat the failure of the warranty as a condition broken (unless there is a special stipulation to that effect in the contract; . . . ) but must have recourse to an action for damages in respect of the breach of warranty. But in cases where the thing sold is not specific, and the property has not passed by the sale, the vendee may refuse to receive the thing proffered to him in performance of the contract, on the ground that it does not correspond with the descriptive statement, or in other words, that the condition expressed in the contract has not been performed. Still if he receives the thing sold, and has the enjoyment of it, he cannot afterwards treat the descriptive statement as a condition, but only as an agreement, for a breach of which he may bring an action to recover damages.⁷

Again there is the rationale that the benefit of property precludes rejection. In terms of remedies, the term which was originally a condition ceases to be available as such⁸ and so the buyer is forced to limit the claim to one for damages.

II. OPERATION OF THE SECOND LIMB OF SECTION 16(3)

5.5 The present concern is the second limb of s16(3),⁹ stating that the passing of property in specific goods precludes rejection. Consideration will be given later to the operation of the first limb.¹⁰

5.6 In order to analyse the operation of the second limb of s16(3)the concept of “specific goods” must be explained. Section 5(1) of the Act states that specific goods are “goods identified and agreed upon at the time a contract of sale is made”. Most consumer sales are within this description. For example, if a customer selects a pair of shoes displayed at a department store, the contract in relation to the shoes is for specific goods. But the concept is not restricted to consumer sales. Thus, if a farmer selects a second-hand tractor displayed in the dealer’s showroom the contract will be in relation to specific goods, as will a commercial contract for the purchase of, say, a load of scrap iron displayed by the seller at its place of business. And a sale conducted by way of auction will generally be a sale of specific goods, the goods being identified and agreed upon on (or before) the fall of the hammer. It is also clear, however, that goods may be identified merely by way of description, as where a buyer purchases a particular machine described as “packed in container 1234 on SS Columbus” (there being only one such machine in the container). By way of contrast, a contract for the sale of “100 tonnes of wheat” is a contract in relation to unascertained, rather than specific, goods. It is unclear whether the goods must be in existence at the time of the contract, that is whether goods to be manufactured, or grown by the seller may be specific by reason of a particular description such as “the crop of wheat to be produced” by the seller in a particular place.¹¹

5.7 Section 23, Rule 1 of the Act provides guidance on the passing of property in specific goods. Unless a “different intention appears”, s23 states:

Rule 1. Where 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, be postponed.

Therefore, assuming that the goods are in a “deliverable state” and the contract is “unconditional”, property passes to the buyer when the contract is made, even if the time of payment or delivery (or both) is postponed by the contract. Assuming that the goods referred to in the examples stated earlier¹² were in a deliverable state, and the contracts were unconditional, property would have passed to the buyer in each case at the time of the contract, even if the buyer promised to pay for the goods at a later date or the seller agreed to deliver the goods to the buyer’s residence or place of business, or both payment and delivery were postponed. Thus, for example, property in the pair of shoes will have passed to the buyer at the time of the contract even if the time of payment was postponed.

5.8 Section 5(4) states that goods are in a deliverable state “when they are in such a state that the buyer would under the contract be bound to take delivery of them”. Although this might have been interpreted as providing that whenever there is a breach of condition the buyer’s ability to reject means that the goods were not in a deliverable state,¹³ the provision has, generally speaking, been narrowly interpreted.¹⁴ In respect of most sales of specific goods the goods will have been in a deliverable state. To return, however, to one of the examples given earlier,¹⁵ if the seller of the scrap iron has agreed to place it in bags for the purpose of delivery, the goods cannot be regarded as having been in a deliverable state. The result in such cases is that Rule 2 of s23 applies and property only passes once the act has been done and the buyer has notice. Thus, the seller must place the scrap iron in bags and the buyer must have notice of this.

5.9 The other concept introduced by s23 Rule 1¹⁶ is the “unconditional contract”. Two meanings have been canvassed. One view is that a contract is unconditional only if there are no essential terms in the contract. The other view is that a sale is not unconditional if there is a condition precedent to the operation of the contract.

5.10 The first view is inherently implausible as there can be no sale if there are no essential terms, and the implied term provisions (ss 17-20) virtually ensure that there will be some conditions in the contract. In other words, if the first view were correct the class of “unconditional contracts” would be virtually empty.¹⁷

5.11 Turning then to the second view, there must be a “condition precedent” (or “contingency”) to the operation of the contract. For example, if the farmer in the example given in para 5.6 agrees to purchase the tractor “subject to” the receipt of a certificate by a named third party showing that the vehicle is in good mechanical condition, the farmer’s obligation to purchase is contingent on such a certificate being received. It is irrelevant, it would seem, whether the condition precedent qualifies the existence of a contract between the parties¹⁸ or the obligation of the buyer to perform.¹⁹ In either case the contract can be regarded as “conditional”. For example in Minister for Supply and Development v Servicemen’s Co-operative Joinery Manufacturers Ltd, ²⁰ a contract for the sale of specific goods provided for payment by “net cash before delivery” and this was held by the High Court to make the contract conditional. That is to say, property in the goods was not to pass until the goods were paid for. On the other hand it has been said²¹ that a “resolutive” condition (or “condition subsequent”) does not make the contract conditional.²² This interpretation is to some extent confirmed by s6(2), distinguishing “absolute” and “conditional” contracts,²³ although it might be argued that a contract subject to a resolutive condition is not an absolute one.²⁴

5.12 The upshot of the above discussion is that, notwithstanding the complexity of concepts involved in the second limb of s16(3), in most sales of specific goods property will pass by virtue of the contract and the buyer will lose the right to reject (assuming there is a breach which would justify rejection) unless there is a term of the contract to the contrary. Although the existence of an express term to this effect is a distinct possibility in a commercial sale, it is most unlikely in a consumer sale. In most consumer sales there is no memorandum of the express terms and, if a document is present, it is likely to be drafted in the seller’s favour.

5.13 The final question, then, is whether there is likely to be any implied term preserving the buyer’s right to reject. It might be argued that in all sales of specific goods there is an implied term to the effect that the passing of property is conditional on the goods being in accordance with the contract.²⁵ However, the cases on which sl6(3) was based²⁶ provide no basis for such a proposition and the clear intention of s16(3) is to make the passing of property a general limitation on the right to reject specific goods. It no doubt comes as a surprise to consumers and commercial buyers alike to discover that their right to reject specific goods for breach of condition by the seller is lost the very moment the contract is entered into, but that is almost invariably the position, ²⁷ unless the seller had no title to transfer and so transferred nothing to the buyer.²⁸

III. CRITICISM OF THE LAW

5.14 The second limb of s16(3) of the Sale of Goods Act 1923 (NSW) can be criticised on at least seven grounds.

5.15 First, the provision is unfair. It is unfair that a buyer should be limited to claiming damages from a seller who has breached a condition simply because property in the goods passed under the contract.

5.16 Secondly, the provision does nothing to encourage performance of the contract by the seller. The seller is entitled to retain the price even though defective goods have been delivered and the buyer is forced to litigation for the purpose of obtaining compensation. If the buyer were entitled to reject the goods the seller would have greater incentive to deliver goods in conformity with the contract.

5.17 Thirdly, the provision does not accord with the understanding of the layperson who treats the supply of defective goods as being a basis for rejection of the goods in most situations.

5.18 Fourthly, the provision is out of line with what is accepted as sound commercial practice, namely to promote goodwill by allowing buyers to return defective goods. It is common knowledge that sellers, particularly the larger department stores, will allow defective goods to be returned. No doubt the practice goes beyond any legally justifiable course of conduct since even a buyer who has merely changed his or her mind will often be given a refund on goods purchased, but the practice should be reflected by the Act in cases where the seller has breached a condition.

5.19 Fifthly, there is a lack of uniformity in Australia, and the New South Wales provision now reflects a “minority view”. As will be explained,²⁹ in some other jurisdictions this restriction is no longer part of the sale of goods legislation. Moreover, the limitation is not present for buyers who can bring themselves within s75A of the Trade Practices Act 1974 (Cth).³⁰

5.20 Sixthly, and perhaps most fundamentally, the second limb of s16(3) is based on unsound legal premises. As has been explained, the two bases for the provision are that a buyer cannot unilaterally revest title, and that for rejection to take effect the parties must be restored to their pre-contractual positions.

5.21 Now it can be conceded that for rejection to take effect the buyer must re-transfer the property in the goods, since the retention of property would be inconsistent with the election to terminate. But the modern authorities³¹ clearly show that the buyer’s election has that effect. The modern cases³² on the general law of contract also reject the notion that for termination of a contract to take effect the parties must be restored to their pre-contractual positions. This notion of restitutio in integrum, whilst certainly applicable to cases of rescission ab initio for misrepresentation or mistake,³³ does not, generally speaking, apply to termination for breach or repudiation. This is because termination relates to the future only; it is the performance of the contract, not the contract itself, which is terminated. There is no reason why any other rule should apply to a sale of goods and it should be sufficient to revest title that the buyer has communicated a rejection of the goods to the seller.

5.22 Finally, the present provision can be seen as a reminder of the importance attached by nineteenth century lawyers to the distinction between contract and property. That is to say, once a contract has had the effect of passing a legal interest in property, the lawyers of the nineteenth century tended to treat contractual principles as less significant. Nowadays the argument that the transfer of an interest in property prevents the application of normal contractual principles is almost always rejected.³⁴

IV. THE TRADE PRACTICES ACT 1974 (CTH)

5.23 Section 75A(l) of the Trade Practices Act 1974 (Cth) confers a right of “rescission” for breach of a condition implied by virtue of Division 2 of Part V into a contract for the supply of goods by a corporation to a consumer. The subsection also specifies the way in which rescission must be effected, and s75A(2) specifies circumstances in which rescission will not be effective. Section 75A(3) provides:

Where a contract for the supply of goods by a corporation to a consumer has been rescinded in accordance with this section-

(a) if the property in the goods had passed to the consumer before the notice of rescission was served on, or the goods were returned to, the corporation-the property in the goods re-vests in the corporation upon the service of the notice or the return of the goods; and

(b) the consumer may recover from the corporation, as a debt, the amount or value of any consideration paid or provided by him for the goods.

Section 75A(4) states expressly that the right of rescission under the section is in addition to, inter alia, any other right or remedy under any State Act or “any rule of law”. Thus, the restriction on the right of rescission imposed by s16(3) of the Sale of Goods Act 1923 (NSW) will not apply if the buyer is able to invoke s75A ³⁵

5.24 Since s75A(3)(a) of the Trade Practices Act 1974 (Cth) provides for the revesting of property in goods where this has passed to the consumer, the clear intention is that the right of rescission should be available notwithstanding that property in the goods has passed under the contract. ³⁶ Thus, if a buyer happens to be a consumer who has purchased from a corporation, as these terms are defined by the Trade Practices Act, the buyer will be in a more favourable position than a buyer who is not a consumer, or where the buyer has not purchased from a corporation. ³⁷ Although there is little doubt that consumer buyers are those most in need of protection in this context, since s16(3) of the Sale of Goods Act 1923 (NSW) has its primary operation in the context of consumer contracts, it is unsatisfactory that the scope of protection should be dictated by the scope of the Commonwealth Government’s legislative powers. This has the result that, in New South Wales, a consumer purchase from a sole trader or partnership is subject to the restriction imposed by s16(3).

V. OTHER JURISDICTIONS

5.25 In the United Kingdom, the provision corresponding ³⁸ to s16(3)of the Sale of Goods Act 1923 (NSW) was amended by s4(l) of the Misrepresentation Act 1967 (UK) and the words “or where the contract is for specific goods, the property in which has passed to the buyer”, deleted. Thus, the passing of property in specific goods is not of itself a bar to rejection of goods under the Sale of Goods Act 1979 (UK). There are no features peculiar to the conditions in the United Kingdom which would justify the divergence of New South Wales law.

5.26 More telling is the fact that the Australian Capital Territory³⁹ and South Australia⁴⁰ have followed the British lead. In Victoria s16(3) of the Goods Act 1958 (Vic) corresponds exactly to s16(3) of the New South Wales Act, except that in consumer sales⁴¹ it has no operation.⁴² Thus, in respect of consumer sales “acceptance” of goods (as defined by s99 of the Goods Act 1958 (Vic)) is the criterion for loss of the right to reject.⁴³

VI. RECOMMENDATION

5.27 We recommend that the passing of property in specific goods should no longer of itself bar rejection. The consequence of implementation would be for the loss of a buyer’s right of rejection to depend on whether the goods have been accepted under s38.⁴⁴

1. This is defined in s38; see para 6.2.

2. For the current position in the United Kingdom see para 5.25.

3. See Chalmers’ Sale Of Goods (1st ed 1894) p24 nl, pl72.

4. (1831) 2 B & Ad 456: 109 ER 1212.

5. (1863) 3 B & S 751; 122 ER 281.

6. See (1831) 2 B & Ad 456 at 462-464; 109 ER 1212 at 1214-1215.

7. (1863) 3 B & S 751 at 755-756; 122 ER 281 at 283.

8. This is often expressed by saying that the condition becomes a warranty “ex post facto” (Chandris v Isbrandtsen-Moller Co Inc [1951] 1 KB 240 at 252 (reversed on other grounds [1951] 1 KB 240 at 255)). But cf Wallis v Pratt [1911] AC 394 at 395.

9. See paras 5.6-5.13

10. See Ch 6.

11. See Benjamin’s Sale o Goods (2nd ed 1981) paras 122-133.

12. Para 5.6.

13. Atiyah, “The Right to Reject Goods for Breach of Condition” (1956) 19 Mod LR 315.

14. See Benjamin’s Sale of Goods (2nd ed 1981) para 308.

15. Para 5.6.

16. Para 5.7.

17. But see Taylor v Combined Buyers Ltd [1924] NZLR 627 at 648-649. Cf Varley v Whipp [1900] 1 QB 513.

18. Pynt v Cambell (1856) 6 E & B 370; 119 ER 903 is a well known example.

19. The modern tendency, in the general law of contract, is to construe most “subject to” provisions in this way (see, eg Meehan v Jones (1982) 149 CLR 571 (“subject to finance”)), although use of the expression “subject to contract” creates a presumption that the existence of a contract is contingent on the execution of a formal document (see Masters v Cameron (1954) 91 CLR 353).

20. (1951) 82 CLR 62 1.

21. McPherson Thom Kettle & Co v Dench Bros [1921] VLR 437 at 444.

22. However, this view can be criticised on the ground that the condition precedent/condition subsequent distinction tends to depend more on form than substance; see Lindgren, Carter and Harland, Contract Law in Australia (1986) para 741.

23. See Benjamin’s Sale of Goods (2nd ed 1981) paras 304-306.

24. See Bannerman v White (1861) 10 CB(NS) 844 at 860; 142 ER 685 at 692.

25. Cf Kwei Tek Chao v British Traders and Shippers Ltd [1954] 2 GB 459 at 487 (cif contract).

26. See paras 5.3-5.4.

27. See Smith, “The Right to Rescind for Breach of Condition in a Sale of Specific Goods under the Sale of Goods Act, 1893” (1951) 14 Mod LR 173.

28. Rowland v Divall [1923] 2 KB 500.

29. See paras 5.25-5.26.

30. See paras 5.23-5.24.

31. See, eg McDouyall v Aeromarine of Emsworth Ltd [1958] 1 WLR 1126. And cf s50(3),(4) (resale by unpaid seller).

32. See, eg McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457; Heyman v Darwins Ltd [1942] AC 356; Johnson v Agnew [1980] AC 367 and see Carter, Breach of Contract (1984), paras 1054-1056, 1201, 1206, 1215.

33. Clearly the requirement is the strict requirement of the common law (see Lindgren, Carter and Harland, Contract Law in Australia (1986) para 1126) so there is no question of “substantial” restitution as would be possible in equity.

34. A recent example is Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 59 ALJR 373 (lease of land-application of repudiation concept).

35. Alternatively the consumer may invoke the provisions of the Consumer Claims Tribunal Act 1974 (NSW) and obtain an order under s23; but the consumer cannot obtain more than $500.

36. See Polgardy v Australian Guarantee Corp Ltd (1981) 52 FLR 240 at 242.

37. The Act may have a more extended operation in certain cases.

38. Section 11 (1)(c) of the Sale of Goods Act 1893 (UK); see para 5.2.

39. See sl6(4) of the Sale of Goods Ordinance 1954 (ACT) as substituted by s3 of the Sale of Goods Ordinance 1975 (ACT).

40. Section 11(3) of the Sale of Goods Act 1895 (SA) was amended by s11 of the Misrepresentation Act 1971 (SA).

41. As defined by s85 of the Act which was inserted by s2 of the Goods (Sales and Leases) Act 1981 (Vic).

42. See s118 of the Act, inserted by s2 of the Goods (Sales and Leases) Act 1981 (Vic).

43. See further para 5.27.

44. There is some support for the view that at present s38 does not apply to a sale of specific goods where property has passed to the buyer: Lucas v Smith [1926] VLR 400 at 403. The contrary was, it seems, assumed by the Court of Appeal in Leaf v International Galleries [1950] 2 KB 86.