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Part X Transfer of Title, 40 Transfer of Title by a Non-Owner

From: Global Sales and Contract Law (2nd Edition)

Ingeborg Schwenzer, Edgardo Muñoz

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 06 June 2023

Contract — Goods — Contract and transfer of title — Documents of title — Interests and terminology and transfer of title — Passing of property

(p. 551) 40  Transfer of Title by a Non-Owner

A.  General

40.01  Every buyer entering into sales contracts has a right to either itself becoming the owner of the goods or being authorized to transfer title to a third party. This expectation is of particular importance to buyers who intend to subsequently resell the goods. In these scenarios they enter into sales contracts as sellers. Thus, in turn they take on the obligation to deliver the goods and transfer title. Where the original sales transaction has for any reason failed to effectively transfer title, the question arises whether reselling (non-owner) buyers are nevertheless able to give title to their purchasers.

40.02  It is interesting to note that, in regard to the transfer of title by a non-owner, the approaches adopted by legal systems cannot be categorized along traditional legal family lines.1 For example, common law jurisdictions can be found to draw more heavily on Roman tradition than do some of those legal systems that would traditionally be more associated with Roman law.

I.  Interests Involved and Practical Relevance

40.03  The concept of ownership has gained worldwide acceptance. The right to own property and to not be arbitrarily deprived of it has been recognized in Article 17 of the Universal Declaration of Human Rights 1948. It has also found its way into many constitutions drafted and enacted (p. 552) subsequent to that Declaration.2 A situation where an unauthorized non-owner could deprive the owner of its title by transferring such title to another amounts to severe interference with this right. Consequently, owners can and do expect laws not to undermine and indeed to protect their ownership.

40.04  At the same time, sustainable market economies require the constant exchange of goods against counter-performance, usually money. For this to occur, the market must have confidence in the effectiveness of commercial transactions. As such, especially in a commercial environment, buyers demand that their reliance on becoming the owner or authorized reseller be protected.

II.  Typical Scenarios

40.05  Questions concerning the transfer of title by a non-owner can arise in various fact scenarios each of which may have different consequences depending on the jurisdiction. However, broadly speaking, there are three factual circumstances that are particularly prone to occur in the field of the sale of goods.

1.  Factual Circumstances

40.06  In the standard scenario where the issue of acquisition of title from a non-owner arises, the buyer is under the impression that the seller with whom it contracts is the owner of the goods that are the object of the contract. Typically, the fact that the seller is in possession of the goods leads the buyer to believe that the seller is also the owner of the goods. The question of whether the non-owning seller is able to pass title to the buyer in these situations is a matter of property law.

40.07  In other instances, the buyer is aware that the seller is not the owner of the goods but rather deduces from the surrounding circumstances and the seller’s conduct that the seller is authorized to pass title. This is especially true in case of mercantile agents. In these instances the buyer is typically not aware of the precise owner of the goods but is very well aware of the fact that dealing with third party goods is precisely the business of the mercantile agent. The buyer therefore usually supposes that the agent is authorized to pass title to the goods.

40.08  These situations touch upon issues relating to both the law of agency as well as property law. Whether apparent authority is at all recognized is a question of agency. Whether it is sufficient for the buyer to believe that the seller is authorized to pass title in order to acquire title in good faith is a matter of property law. In particular, this pertains to the question as to the reference point for the good faith of the buyer—that is, the question of whether the buyer must be in good faith regarding the ownership of the seller or whether it is sufficient if the buyer in good faith believes the seller to be authorized to transfer title.

III.  Encumbrances

40.09  Situations involving the sale of goods encumbered with third party rights are discussed separately in the context of legal defects.3 With regard to the acquisition of ownership, legal systems do not establish special rules to the effect that the title, if at all acquired by the recipient, is in any way stained with the previous encumbrances. Rather, as far as legal systems acknowledge the acquisition of title from a non-owner, it is not only the title of the original owner that is eliminated but also any encumbrances. This may be justified on the basis that the most (p. 553) powerful right to a good is ownership. If the law permits that right to be eliminated it would appear strange to have weaker rights to the goods remaining intact.

IV.  Same Rules for Cultural Goods

40.10  The sale of and transfer of title to cultural goods has been at issue before numerous courts in different jurisdictions. However, this area of sales law has witnessed a veritable upheaval in the last 20 years. In particular, cultural goods originating in sensitive and critical regions or countries have prompted domestic, supranational, and international legislative bodies and institutions such as UNIDROIT to specifically deal with this issue.4 It is therefore worth mentioning cultural goods separately.

40.11  The majority of international instruments primarily oblige Contracting States to structure their property legislation in such a way as to prevent the illicit trade of cultural goods or—as in the case of EC regulations—establish immediate restrictions on the trade of cultural goods. In that sense, these instruments do not themselves establish rules on the transfer of title. Hence, the domestic property law rules governing the acquisition of title from a non-owner in principle apply to cultural goods as well. However, domestic legislators may have to modify these rules to achieve the goals set out in the international instruments. An exception in this regard is the 1995 UNIDROIT Convention on Stolen or Illegally Exported Cultural Objects which contains express rules relating to the transfer of ownership in stolen or illegally exported cultural goods and also addresses issues of compensation of the buyer.5

40.12  At the domestic level the rules on the acquisition of title from a non-owner have not been changed as far as their basic structure is concerned. However, legal systems may have established different limitation periods for claims for restitution of the cultural item concerned.6

B.  Different Approaches

40.13  From a comparative perspective, the issue of the acquisition of title from a non-owner is one of the areas of law where there are clearly different approaches taken by legal systems.

I.  General

40.14  All legal systems are faced with the competing interests of the original owner of the goods and the recipient as well as the commercial necessity for goods to circulate freely. Hence, all legal systems have made efforts to balance out these interests. In doing so, legal systems have opted for different approaches raising different questions. Apart from some general remarks on the different starting points, these are discussed in greater detail below.7 At this stage the focus lies on those issues that are the same for all legal systems independent of the approach taken to the transfer of title by a non-owner. This relates to the notion that the entire issue is only of relevance where the buyer is in good faith. Furthermore, all legal systems have given consideration (p. 554) to the question whether the goods were acquired for value. Finally, the position of the (original) owner was under scrutiny in all legal systems.

1.  Starting Points

40.15  Bearing in mind that protection is—as a matter of principle—either granted to the original owner or to the recipient of the goods, legal systems are only left with two possible starting points. Both starting points are used by legal systems and it is difficult to tell which one is more popular with legislators. This is even more so as sometimes legal systems have shifted from one to the other and thus it cannot be said that one of them is more modern or more traditional.

40.16  In brief, the two competing approaches to the question of whether acquisition of title from a non-owner is possible are the so-called nemo dat rule on the one side and the protection of the bona fide purchaser on the other side. The first of these approaches strictly protects the original owner by stating that no one can give a better right than they themselves hold. The second approach, on the other hand, protects the recipient. According to this approach, the recipient acquires title and subsequently can resell the goods as their owner.

40.17  Obviously, these starting points differ significantly. However, independent of which starting point was chosen by a legal system, no system has neglected to take the competing interests into account. Consequently, legal systems have established exceptions to their general rules. In fact, these exceptions can be said to have a converging effect as in many instances the practical result will be the same. In other words, in those instances where it matters, legal systems protecting the owner give due regard to commercial necessities and protect the bona fide recipient. On the other hand, legal systems starting out with the protection of the bona fide recipient as the general rule protect the original owner where otherwise the restrictions on the concept of ownership—and thus a fundamental right—would appear all too harsh.

2.  Bona Fide Purchaser without Notice

40.18  It is useful for the purposes of this chapter to point out that the issue of transfer of title by a non-owner is only relevant where the recipient of the goods is not aware of the fact that the seller is neither the owner nor authorized by the owner to transfer title. No legal system envisages the transfer of title from a non-owner to a recipient who is in bad faith regarding the ownership or the authorization to transfer title. The remarks in this chapter are built on that premise.

40.19  The terminology as to the state of awareness differs among legal systems. Civil law legal systems typically require that the recipient be in good faith. In common law jurisdictions it is more common to speak of a bona fide purchaser for value without notice.8 The difference in substance between these terms is that the common law terminology requires that the recipient obtained the goods in exchange for value—that is, that the buyer did not receive the goods gratuitously. In civil law systems the question whether the recipient has acquired the goods for value is also of relevance but dealt with at a different stage.

(a)  Persons Covered

40.20  It is recognized in all legal systems that not every person can be a bona fide purchaser without notice. For legal systems protecting the bona fide recipient of the goods, the following textbook example is typically used to exemplify the issue. A lends his car to B. B turns to his friend C who is not aware of the situation between A and B. B transfers title in the car to C who pays a certain amount of money. As C is protected in his belief that B is the owner of the car, C is now the owner of the car. Immediately after that transaction B asks (p. 555) C to undo the transaction. C agrees. As C is the owner of the car he is now able to transfer title to B who then acquires ownership. As a result, A is deprived of its ownership.

40.21  In common law jurisdictions it is typically stated that the purchaser must be at arm’s length. Civil law jurisdictions require that the transaction is not only a formal alteration of the legal situation but, in addition hereto, that the seller and buyer are not economically identical.

40.22  Specific problems may arise where the recipient of the goods is in bad faith but the agent who is entrusted with the acquisition of the goods is in good faith. In essence, the bad-faith principal attempts to hide behind the good faith of the agent. As discussed elsewhere in this work,9 in agency constellations, it is typically the state of mind of the agent that is relevant, not that of the principal. In order to prevent the expropriation of the owner by a bad-faith principal hiding behind a good-faith agent, some legal systems require that both be in good faith.10 Other systems only do so where the agent has acted on instructions of the principal.11

40.23  With regard to legal persons, difficulties may arise where several persons act as agents and one of them is in bad faith. In these situations, some legal systems deny protection where one of the agents is in bad faith.12 Whether additional persons involved in the factual handling of the transfer also have to be in good faith is disputed.13

(b)  Reference Point of Good Faith

40.24  While the requirement for the existence of good faith on the part of the purchaser is universally accepted, there is dispute as to the reference point of good faith. In other words, the question arises in which respect the purchaser must be in good faith. The issue is whether it is sufficient for the purchaser to believe in good faith that the seller is authorized by the owner to transfer title or whether it is necessary for the buyer to believe that the seller is actually the owner of the goods.

40.25  This question may appear subtle but it is of significant practical relevance. For example, a buyer who deals with a mercantile agent typically believes that the agent is authorized to transfer title even though the agent is not the owner of the goods. Where a legal system does not deem it sufficient that the buyer believes the seller to be authorized to transfer title, instead requiring that the good faith of the purchaser relates to the seller’s ownership, a buyer could never acquire title from a mercantile agent who is not actually authorized to pass title.

40.26  Legal systems differ in their approach to the reference point for good faith. One group of legal systems distinguishes commercial and private transactions. This applies in particular to common law legal systems but also to Germany. In common law legal systems the buyer’s perception that the seller is authorized to transfer title in the goods is only protected if the transfer is made to a buyer in the ordinary course of business.14 In the USA, § 1-201(9) UCC defines such a buyer as a person who obtains goods ‘without knowledge that the sale to him is in violation of the ownership rights or security interest of a third party’.

(p. 556) 40.27  In Germany, the unambiguous wording of § 932 CC in the official English translation states that ‘The acquirer is not in good faith if he is aware, or as a result of gross negligence he is not aware, that the thing does not belong to the alienor.’ The rule is subject to much criticism and the majority view advocates an application by way of analogy to situations where the seller is authorized to transfer title by the person the seller deems to be the owner because it is in possession of the goods.15 In the field of commerce, the German Commercial Code supplements the German Civil Code in this regard as § 366 Com C states that where a merchant sells goods in the course of its business, it is sufficient that the buyer believes the seller to be authorized to sell and transfer title to them. It is not required that the buyer also believes the seller to be the owner.16

40.28  Another group of legal systems requires the good faith of the purchaser to relate to the ownership of the goods. Although this approach is prominently adopted by the German Civil Code,17 it is fundamentally a Romanistic one. Thus, it can be found primarily in legal systems belonging to that legal family, particularly in Ibero-American legal systems,18 Arabic legal systems,19 and also in individual jurisdictions in the USA (Louisiana20) and Canada (Québec21), and others.22 However, there is some debate on the matter in these legal systems as well. In French law there are statements to the effect that good faith regarding the authorization of the seller to transfer title is sufficient.23 Yet, this does not appear to be the majority view.24 In Italy the Supreme Court, alongside the majority view in scholarly writings, has explicitly rejected the notion that good faith regarding the authorization of the seller is sufficient.25

40.29  A third group of legal systems neither distinguishes between commercial and private sales nor requires good faith to exclusively relate to the ownership or authorization of the seller. Rather, these legal systems deem it sufficient for any buyer to either believe that the seller is the owner or that it is authorized to transfer title in the goods.26 This approach is also followed at the international level, where Article VIII.-3:101(1)(d) DCFR requires that the purchaser ‘neither knew nor could reasonably be expected to know that the transferor had no right or authority to transfer ownership’.

(c)  Standard of Good Faith

40.30  Independent of whether it is sufficient for the buyer to be in good faith regarding the authorization of the seller to transfer title or whether it is required (p. 557) that the buyer in good faith believes the seller to be the owner of the goods, it is clear that where the buyer knows that this is not the case it deserves no protection. It is neither protected by legal systems generally protecting the bona fide purchaser, nor by any of the exceptions to the nemo dat rule in other legal systems. However, the question arises to what extent a legal system is prepared to protect a buyer where the lack of ownership or lack of authorization was recognizable. It is therefore necessary to determine whether and to what extent the buyer is protected where it was negligent in not realizing the real legal situation. In other words, the standard of good faith is decisive.

40.31  At this stage it is important to remember that where a legal system protects the expectation of the buyer to become the owner of the goods—be it as a general rule, be it by way of exception—on account of the buyer’s good faith, the legal effect is an expropriation of the original owner. The standard that is required for the buyer to be in good faith may therefore also serve as a certain corrective tool to the interference with the legal position of the original owner.27

40.32  A first distinction made in comparative analysis of legal systems in this respect is that between a subjective and an objective approach to good faith. The subjective approach is understood to exclusively focus on the state of mind of the recipient while the objective approach focuses on the factual circumstances surrounding the transaction independent of the particular recipient.28

40.33  This distinction is, however, of greater relevance for the methodological approach taken by legal systems to situations where the buyer’s ignorance of the legal situation was due to its own negligence29 than it is for the practical outcome. From a mere technical perspective, those legal systems following a subjective approach to the notion of good faith acknowledge that a buyer who has no actual knowledge of the real legal situation technically is in good faith. However, these legal systems do not allow the buyer to rely on its good faith if the negligence is of a certain severity. Legal systems following an objective approach to the notion of good faith deny the existence of good faith on the part of the buyer to begin with where the factual circumstances indicate a certain degree of negligence on its side. The practical difference of these approaches—if at all existent—is marginal. At the end of the day the question is always whether the buyer’s expectation is protected under the given circumstances of the case.

40.34  At first glance legal systems vary with regard to the applicable standard of good faith. Some systems deny protection to the buyer where it was negligent in not realizing the real legal situation.30 Other legal systems require gross negligence.31 Then again, in common law jurisdictions the relevant phrasing is that the buyer must have acted ‘honestly’.32 While this is understood to mean that the buyer must have acted without positive knowledge of the real legal situation, negligence of the buyer is an important factor to prove that the buyer was not actually in good faith.33 In some instances the necessary corrective measure is provided by the (p. 558) requirement that the transfer was made in the ordinary course of business, for example where the seller is a mercantile agent.34

40.35  While these phrasings appear to indicate practical differences in results achieved, the practical outcomes are by and large uniform. One might find a reason for this in the vagueness of the standards established by legal systems. It is widely agreed that there is no duty on the buyer to inquire into the legal situation. This may only be different where other circumstances indicate to the buyer that the seller is either not the owner or not authorized to transfer title in the goods.35 An important factor in this respect is the proportion of the purchase price to the object of the sales contract.36 Furthermore, the identity of the seller, its conduct, the time and place of the transfer, or unusual payment modalities may require the buyer to make further inquiries.37 In any case, the buyer is well advised to make inquiries, even if no such duty is imputed on it, as the circumstances listed will typically be sufficient to prove the necessary degree of negligence on its part.

40.36  Specific questions arise where public registers technically allow the buyer to take notice of the real legal situation. This is particularly the case where ownership is registered. Typically, such registers only exist for immovable property.38 The most important exceptions to this rule are registers for ships, aircraft, and cars. In some systems the rules on the good-faith acquisition of title from a non-owner do not apply to registered goods to begin with.39 In other systems a distinction is made regarding the purpose of the register. Thus, in France for example, cars, though registered, are encompassed by the rules on the good-faith acquisition of title from a non-owner.40 The register is considered to be only of administrative value.41 This is, however, different for ships and aircraft.42

40.37  In some systems—for example Switzerland—special registers exist for goods which are subject to a title retention clause. Under Swiss law, a retention of title clause is effective only if it is registered at the place of the recipient of the goods. This raises the question whether a buyer is in good faith when contracting with a seller for goods that previously have been sold to the seller under a registered retention of title. In other words, the question is whether the buyer is expected to be aware of a registered retention of title clause. In Switzerland, courts do not (p. 559) deem every buyer to be aware of retention of title clauses and thus to be in bad faith regarding the ownership of the seller.43 Only certain merchants—for example, used car dealers and antiques dealers—are in some instances required to consult the register before the transaction.44

(d)  Relevant Point in Time

40.38  It is almost unanimously agreed by legal systems that it is the time of transfer of title which is relevant for the good faith of the buyer to be present.45 At the international level this approach was also adopted in Article VIII.-3:101(1)(d) DCFR. It should be noted that also in those legal systems where the usual transfer of title occurs upon the conclusion of the sales contract the reference point is not the conclusion of the contract but the—admittedly connected—transfer of title. For French law in particular it must also be noted that the good faith of the buyer in relation to the ownership of the seller at the time of transfer even cures defects of the underlying sales contract.46