Legal Article - Business Law

When does Title pass from Seller to Buyer?

The general rule under common law is that “no one can give what they have not got” i.e. you cannot sell something for which you do not have title.

So in the case of ownership of a car, if the car were to be stolen the original owner maintains title of the vehicle meaning it can’t become legally owned by anyone else. It does not matter that the car has been sold through several other peoples’ hands even though they were innocent of the theft.

The classic case is for a vehicle to end up with a private customer. They then have to sue the seller and the seller sues the previous seller and so on.

Unfortunately it is often the case that although the person that “bought” the vehicle from the thief has a claim against them, the thief is either “not at home” or is in jail without funds to settle the claim.

Cheque Fraud Prevention Using the Romalpa Clause

Cheque Fraud Prevention – Using the Romalpa Clause

There are many cases about the use of cheques and the law is complex. With regard to the use of normal bank cheques the contract is simply the exchange of a car for a cheque, representing the price. Title passes from the seller to the buyer. But what if the person writing the cheque is not who they say they are? What if the person cancels the cheque after they have received the goods?

In one famous case a rogue managed to con the seller, who was wary about accepting the cheque, by saying he was a famous actor and producing a pass for Pinewood Studios. The seller accepted the forged cheque. The conman then sold the vehicle on to another person assuming the identity of the first victim.

The courts held that the first contract was valid and the second buyer should get the good title. The courts stated the first sale to the rogue was “voidable” not “void”; this means that it could have been declared void but because that had not happened before the innocent buyer acquired the vehicle then that innocent buyer got good tile.

So what steps could a prudent seller take if they find they have been conned to “avoid” the contract. Essentially the person must let as many people as possible know, which, for a car retailer, means informing the Police and all the security registers as soon as the deception is realised.

If the seller accepts a cheque and the buyer subsequently cancels the cheque then generally title will be deemed to have passed and effectively all the seller can do is sue the buyer for the price.

It is a wise precaution to include a special clause on your motor industry stationery stating that title does not pass until the purchase price has been received in full and all cheques have been cleared. This type of term is called a Romalpa Clause. It will generally not disturb third party’s rights but it can help if the buyer still has possession.

As indicated before, the law is complex. The use of a stolen building society cheque was the subject of another appeal case. In that particular case a rogue used a stolen building society cheque to purchase an expensive watch and ring. When the seller presented the cheque to the bank it was found to be worthless. The rogue had completed the details on a stolen blank cheque.

This case was distinguished from the previous “cheque” case in that the type of cheque was held to be very important. The court took the view that title was intended to pass only in exchange for a valid building society cheque. In the case of selling a car title frequently passes when the customer hands over a deposit, which can be cash, cheque, credit card or simply the signing of the Order Form.

The contract simply ties in when delivery of the car and the balance is to be exchanged at some future date. In the building society cheque case the dispute arose when the seller tried to claim on his household insurance for theft. The insurers tried to argue that the sale was like the normal cheque case, the seller had agreed to the transfer before the exchange of goods and cheque and so the contract was voidable and not void.

The court would not support the insurers and as stated previously put great emphasis that the type of cheque had special attributes which most people see as good as cash. 

Although it wasn’t stated in the case we believe the case would have had the same outcome in the case of a stolen bankers draft.

Selling the Same Car Twice

Selling the Same Car Twice

If a seller sells a car to one person but before the car is released to the buyer, the seller resells it to a second person (who has no knowledge of the first sale) then the effect is that the second person will get good title.

Selling the same car twice can result in the first person suing the seller, but the second person gets the car.

Special Rights to Customers buying Cars subject to Hire Purchase

Special Rights to Customers buying Cars subject to Hire Purchase

The Hire Purchase Act 1964 (as amended) gives special rights to customers buying cars subject to Hire Purchase and Conditional Sale agreements.

Under a Hire Purchase/Conditional Sale agreement the finance company generally own the car until the end of the finance agreement. If a person has the vehicle on such a finance agreement then sells it to a private and innocent purchaser the purchaser gets good title to the car. The only recourse the finance company has is against the person who had it on finance or any of the trade buyers/sellers in between.

The rules are very strict and the legislation is simply a protection measure for private buyers of cars, which obviously can readily be acquired on finance by someone with less than honourable intentions or increasingly selling on by someone who is in financial difficulties.

The rules are:

a) The buyer must be a private buyer. If they are a motor trader or operate a finance business then they are excluded.

b) The buyer must have no knowledge of the car being on finance.

The rights are extended by the fact that if the original customer who has it on finance sells the car to a non private buyer e.g. a motor dealer and it perhaps goes through a chain of motor dealers before finally being sold to a private and innocent purchaser then that last person will still get good title.

So too does anyone also purchasing the vehicle, even the motor dealer, after it has gone through the hands of an innocent private purchaser.

This is not an unusual scenario because cars quite often move in the trade and in some cases a criminal will use this tactic with false names and addresses to lose the car (but get paid for it of course!).

In cases with multiple transactions the finance company has no rights to possession or money from the final private and innocent buyer. They can however sue anyone else in the chain. Quite often they will claim from the final non private seller because they may be innocent of any criminal activity and if selling to private buyers will often have a stable business with money and an address where court documents can be served. The onus falls on the innocent trader to sue the person who sold it to him/her providing they are not the rogue who has carried out a disappearing trick!

So what can be claimed by the finance company if this situation arises? The action of selling or disposing of someone else’s goods is referred to as Conversion and the following article will set out the points.

Tort of Conversion - How much can the Finance Company Claim?

Tort of Conversion - How much can the Finance Company Claim?

If someone sells or otherwise disposes of a car to which they do not own, or have title, they fall foul of the tort of conversion.

A typical scenario may be a car passing through the hands of a dealer which is worth £1000 but £1500 is outstanding to the finance company. How much can the finance company claim? A similar case was heard on appeal and it was held that the proper measure of damages is the market value of the goods or the amount still owing under the agreement whichever is the less.

Check with your insurer or broker for insurance cover for conversion.

The Vehicle is Subject to Finance but not on a Register

The Vehicle is Subject to Finance but not on a Register

The use of the various registers to check whether cars are on finance or are subject to any other security alerts is a wise precaution. It may show up problems, which you weren’t expecting.

However there are two important parts to remember.

a) If you buy a car which, say, is subject to finance, and it is not on a register when you check it, you don’t escape liability even though you have taken that wise precaution. Insurance is available but as with all insurances, check the small print and make sure it is what you want and covers you.

b) If the car was not recorded on the register, but should have been, you cannot sue the register company for negligence.

Published: 10 Mar 2011


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