Consumer sales contracts: transfer of ownership

Current project status

• Initiation: Could include discussing scope and terms of reference with lead Government Department
• Pre-consultation: Could include approaching interest groups and specialists, producing scoping and issues papers, finalising terms of project
• Consultation: Likely to include consultation events and paper, making provisional proposals for comment
• Policy development: Will include analysis of consultation responses. Could include further issues papers and consultation on draft Bill
• Reported: Usually recommendations for law reform but can be advice to government, scoping report or other recommendations

The Law Commission has published a report with draft legislation which would implement recommendations it made in July 2016 to modernise the rules on when consumers acquire ownership of goods under sales contracts.

Download the report and draft legislation here

Download the summary of the report here

Download a Welsh summary of the report here

The problem

Consumers often pay for goods in advance of receiving them. This happens whenever consumers buy goods online. It can also happen when consumers pay for goods in a physical store, but the goods have to be made to the consumer’s order, are not available to be taken away there and then or are left with the retailer to be altered. If the retailer goes insolvent before the goods are delivered to the consumer, who owns the goods?

Currently, the answer depends on complex and technical transfer of ownership rules which have remained largely unchanged since the late 19^th century.  Some of the terminology is old-fashioned and unclear and these rules were not designed with consumer transactions in mind, let alone internet shopping. As a result, the rules can be a source of confusion for consumers. On retailer insolvency, consumers can have difficulty understanding why they cannot claim goods they have paid for.

The project

This project follows on from our July 2016 Report, Consumer Prepayments on Retailer Insolvency. In that report, we made recommendations for reform of the transfer of ownership rules as they apply to consumers. The Department for Business, Energy and Industrial Strategy (BEIS) has asked us to do further work on this issue, to produce legislation and to consider its potential impact. We consulted on a draft, and asked about impact, in July 2020. We have now published our final report and draft legislation.

The draft legislation is intended to simplify and modernise the transfer of ownership rules as they apply to consumers, so that the rules are easier to understand. The draft legislation sets out in simple terms when ownership of the goods will transfer to the consumer. For most goods that are purchased online, ownership would transfer to the consumer when the retailer identifies the goods to fulfil the contract. This would occur when the goods are labelled, set aside, or altered to the consumer’s specification, among other circumstances.

However, any decision as to whether to implement the final draft Bill would need to balance a number of relevant considerations to ensure that the benefits justify the potential costs. In particular, during the course of our work, we identified a common practice among retailers of delaying the point at which the sales contract is formed, until the goods are dispatched the consumer. This would reduce the impact of our reforms which, like most consumer protections, depend on a sales contract being in place. The evidence we have received about the practice does not suggest that it causes consumer detriment in more general terms, but we think this, and the case for our reforms, should be kept under review.

The draft Bill

The final draft Bill would introduce new rules into the Consumer Rights Act 2015 around the transfer of ownership under contracts for the sale of goods between a trader and a consumer. The changes include:

• New rules: Different rules would apply, depending on the type of good in question. For example, for a good bought in a physical store, the contract is made when the good is purchased. For a generic item bought online, there are a range of points which could trigger the contract of sale.
• Modernised language: Consumer focused language that is less likely to be misinterpreted would be included. For example, the new rules refer to “trader” and “consumer” (rather than “buyer” and “seller”).
• Mandatory rules: Once implemented, the rules in the draft Bill would become mandatory, nullifying the effect of any contract where ownership of the goods is transferred over at a later point in the process

Contact us

To contact us please email commercialandcommon@lawcommission.gov.uk

Correction to the report

At paragraph 4.71 of the report, we stated that Scottish landlords have a right of “hypothec” over goods on the premises leased by a retailer. We said that the landlord can bring an action to “seize and sell the goods subject to the hypothec in the event of the retailer’s insolvency”.

This statement is incorrect. The ability to bring an action to enforce the landlord’s hypothec (known as sequestration for rent) was abolished by the Bankruptcy and Diligence etc (Scotland) Act 2007. Following the 2007 Act, it has become much more difficult to enforce the landlord’s hypothec although it is clear that it remains a security interest which ranks accordingly in insolvency proceedings.

We are grateful to Lorna Richardson of the University of Edinburgh for drawing this error to our attention.