InRohit Kulkarni v. Manor Credit (Davenham) Ltd [2010] EWCA 69 the Court of Appeal had to decide which of two innocent parties was to suffer as a result of a fraud. The claimant, Dr Kulkarni, had ordered and paid for a new Mercedes CLK sports car from a company, Gwent. Unfortunately the car was not Gwent's to sell. Gwent had possession of the car under a hire-purchase agreement with the car's true owner, the defendant, Manor Credit. After Gwent's fraud was discovered, Manor Credit repossessed the car from Dr Kulkarni's home and he claimed for conversion. The fraudster, Gwent, was clearly susceptible to personal claims by both parties: by Manor Credit for breach of the hire-purchase agreement; and by Dr Kulkarni under section 12(1) of the Sale of Goods Act 1979 (“SGA”) for breach of the implied promise that it had the right to sell the car. Unfortunately, Gwent was in liquidation and those personal claims were likely to be worthless. Thus the proprietary question raised in these proceedings, namely which of the parties had the better title to the car, became crucial.
In general, English law favours the owner of personal property over bona fide third party purchasers. That is because, as a matter of English sale of goods law, no one can transfer a better title than he possesses (nemo dat quod non habet). Here, Gwent had no title to the car and no right to sell, thus Dr Kulkarni would lose to a claim by the true owner, Manor Credit. However, the potential unfairness of that rule is recognised and tempered by a number of common law and statutory exceptions. The exception relied on by Dr Kulkarni was section 27 of the Hire Purchase Act 1964. Under that provision, where a motor vehicle has been bailed under a hire-purchase agreement and, before the property in the vehicle has become vested in the debtor (here Gwent), he disposes of it to a private purchaser (Dr Kulkarni) who buys the vehicle in good faith and without notice, that disposition shall have effect as if the creditor's (Manor Credit's) title to the vehicle had been vested in the debtor immediately before disposition. On the face of it, the section seemed to apply. However, for the exception to operate, there must have been a “disposition” by Gwent at a time when it was “a debtor”, i.e. a hirer under the hire-purchase agreement with Manor Credit. It was accepted by both parties that if the sale to Dr Kulkarni was completed before the hire-purchase agreement was entered into, the exception could not apply. It therefore became crucial to determine when property in the car was intended to be transferred to Dr Kulkarni.
When Dr Kulkarni first ordered his car no particular vehicle was identified or agreed upon, it was a sale by description of unascertained future goods. A second fundamental rule of English sale of goods law therefore came into play, that is, that property cannot pass in unascertained goods (SGA, s. 16). However, property may pass, even before the actual delivery of the goods, when goods of the relevant description, in a deliverable state, are unconditionally appropriated to the contract with assent (the presumption set out in section 18, rule 5(1) of the SGA). Manor Credit argued that this had happened once the identity of the vehicle had been agreed, the registration number passed on and insurance of the car arranged by Dr Kulkarni. Dr Kulkarni disagreed. He argued first that the car was not in a “deliverable state”. Under section 61(5) SGA 1979, goods can only be in a “deliverable state” where “the buyer would under the contract be bound to take delivery of them”. The question was whether this test could be satisfied before the registration plates were attached to the car. As the Court of Appeal noted, the absence of registration plates was in one sense trivial (certainly in the sense of whether the car was of the condition or quality required). However, the car could not lawfully be driven without registration plates. That, according to the Court of Appeal (overruling the judge on this point), was crucial; Dr Kulkarni would not have been bound to take delivery of the car without registration plates attached and therefore it was not in a deliverable state. That was enough for Dr Kulkarni to succeed in his appeal. Property in the car could not have passed to him before the hire-purchase agreement was entered into because the registration plates were not attached before that date; thus he fell within the terms of section 27 of the 1964 Act and accordingly gained title to the car by virtue of that exception to the nemo dat rule.
In case that conclusion was wrong, the Court of Appeal went on to consider a further argument raised by Dr Kulkarni, namely that, in any event, there had been no unconditional appropriation with assent. Broadly speaking, a specific vehicle had been identified as being the subject of the sale. However a mere setting apart or selection of the goods is not enough. On the facts here, Gwent never had property in the car to transfer, it knew it did not, and it knew that it had no intention of fulfilling its contract to transfer property in the car to the buyer. It knew therefore that any assent by Dr Kulkarni to the appropriation had been procured by its own dishonest pretence and as such could not be relied upon to establish an intention that property should pass.
On the broad merits of the case, it seems as though the right party won: Manor Credit was in a much better position than Dr Kulkarni to assess the trustworthiness of Gwent and indeed to absorb the losses caused by Gwent's fraud. But the case is a reminder that the nemo dat rule will often leave innocent third parties like Dr Kulkarni without redress unless they can fit themselves precisely within one of the specific exceptions to the rule. Dr Kulkarni nearly lost out because of a complex point about the passing of property in unascertained goods. It is hard to see how a series of piecemeal and often complex exceptions can really guarantee an appropriate apportioning of loss in these cases and again the question arises whether it is time to reassess the nemo dat rule itself, at least where a party such as Manor Credit has voluntarily parted with possession of goods.
