Plans for new rights for consumers during trader insolvency
31 July 2020
Figures show that online sales have jumped from 19.9% of all retail sales in January to 32.8% in May 2020.
This is very relevant to the Law Commission’s new consultation on draft legislation for England and Wales. The draft legislation would implement recommendations the Law Commission made in July 2016 to modernise the rules about when consumers acquire ownership of goods under sales contracts.
Consumers often pay for goods before they receive them – almost always when they 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 a trader becomes insolvent before the consumer receives the goods, insolvency practitioners may label them as assets of the business, and use the proceeds to pay back creditors in the insolvency. In the worst cases, the consumer may be left with neither the goods they have paid for nor any real prospect of getting their money back.
Currently, the answer of who owns the goods in such a scenario depends on old-fashioned, complex and technical transfer of ownership rules which have remained largely unchanged since the late nineteenth century. The rules are confusing because they were not designed with modern consumer or online transactions in mind eg referring to “property passing” rather than “ownership transferring”.
In 2016, the Law Commission carried out a project from which they published a report, Consumer Prepayments on Retailer Insolvency. In that report, the Law Commission recommended making reforms to the transfer of ownership rules as they apply to consumers. The current rules are contained in the Sale of Goods Act 1979 and apply to all contracts for the sale of goods, regardless of whether the purchaser is a consumer or a business. The Law Commission recommended that the rules for consumer contracts should be updated and moved into the Consumer Rights Act 2015, which currently has the rules imported from the Sale of Goods Act 1979.
The Department for Business, Energy and Industrial Strategy (BEIS) asked the Law Commission to draft legislation which could implement those recommendations and the Law Commission is now consulting on the draft legislation and its impact.
During the course of its work on the consultation, it has learned that, particularly in the context of online sales, retailers commonly seek to delay formation of the contract until the goods are dispatched, or in some cases delivered, to the consumer, and this affects the way the draft Bill is drafted. The timing of the formation of the contract is considered in depth in section 4 of the consultation paper.
The draft Bill would amend the Consumer Rights Act 2015 to create transfer of ownership rules that apply specifically to contracts of sale between consumers and retailers. The proposed rules in the draft Bill distinguish between “goods identified and agreed on” and “goods not identified and agreed on” when the sales contract is made. The draft Bill sets out separate transfer of ownership rules for each type of goods. It also considers bulk goods, although these were not considered in the 2016 report. The paper also considers the interplay with consumers’ rights under section 75 of the Consumer Credit Act 1974.
The Law Commission recommends that legislation should include the following non-exhaustive list of events and circumstances which would be enough to identify ownership by the consumer:
- the goods have been labelled with the consumer’s name in a way that is intended to be permanent;
- the goods have been set aside for the consumer in a way that is intended to be permanent;
- the goods have been altered to a specification agreed between the consumer and the retailer;
- the consumer is told that goods bearing a unique identifier will be used to fulfil the contract;
- manufacture of the goods is completed, if the goods are to be manufactured to a specification agreed between the consumer and the trader;
- the consumer examines the goods and agrees they are to be used to fulfil the contract;
- the goods are delivered to a courier for delivery to the consumer;
- the goods are delivered to the consumer; or
- the goods are identified in some other way by the retailer, and the retailer intends the identification to be permanent.
The changes will not benefit a consumer if the item they have purchased has not yet been made.
The consultation paper:
- asks whether the draft Bill successfully implements the recommendations made in the 2016 report and whether they are accessible and appropriately structured.
- calls for evidence and views about the timing of sales contract formation between consumers and retailers and whether this can have a detrimental impact on consumers.
- asks about the effect of the draft legislation on consumers, businesses, suppliers and insolvency practitioners.
The consultation closes on 31st October 2020. After the consultation the Law Commission will decide on the final text of the draft Bill, which it will publish in a report. It will be for the BEIS to decide whether to implement the draft Bill.
If the law is changed as planned, suppliers will need more than ever to ensure that they have robust payment and retention of title clauses in their terms with the unfortunate trader who may become insolvent, especially bearing in mind the constraints imposed on those suppliers recently by the Corporate insolvency Act 2020.