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5. Nemo dat Rule

Business Law  (Northumbria University)

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Discuss the legal implications of the nemo dat qoud non habet rule?
Usually the sale of goods takes place between the buyer and either the owner of the goods or
by his authorised agent. However, there are some circumstances in which a seller may purport
to sell goods which he does not have any right to sell. In these circumstances the law has to
decide which of two innocent parties to favour: the buyer or the original owner. It is at this
stage that the nemo dat quod non habet rule comes into play and the leading case is VFS
Financial Services Ltd v JF Plant Tyres [2013]. This essay will consider the operation of this rule
and whether the exceptions to it offer an effective compromise to what would otherwise be a
very harsh rule.
In a typical case involving the nemo dat rule the seller (who is not the owner) will have sold
goods to an innocent third party and then will have disappeared or become insolvent so that
the two parties may not be able to seek a remedy from him. Either the owner or the third party
must suffer loss, and the court will have to decide which. As Lord Justice Denning stated in
Bishopsgate Motor Finance v Transport Brakes:
The first principle is for the protection of property that is No one can give a better title than he
himself possesses and secondly the person who takes in good faith and for value without notice
should get a good title. The first principle has held sway for a long time, but it has been
modified by the common law itself and by statute so as to meet the needs of our own times.”
The nemo dat rule is that the transferor of goods cannot pass a better title than he himself
possesses. Nemo dat quod habet, literally means “no one can give what he does not have”. This
rule states that the purchase of a possession from someone which has no ownership right also
denies the purchaser, any ownership title.
The Rule is found in Sales of Good Act (SGA) 1979. According to s.21(1), the SGA 1979 states
‘where the goods are sold by a person who is not their owner, and who does not sell them
under the authority or with the consent of the owner, the buyer acquires no better title to the
goods than the seller had’.
Nemo Dat Rule: The Seller does not have any kind of ownership of property (he is not the
owner) or his right in the property is defective.
Can the buyer acquire the property?  No he cannot because the party A has no title/
ownership in the property.
Party B acquires no better right than the party A

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The rule can be demonstrated by the case of Greenwood v Bennett. In this case the original
owner of a Jaguar car (Bennett) entrusted it to a man named Searle for repairs to be carried
out. Searle then used the car for his own purposes, crashed it and caused extensive damage.
Searle then sold the car to Harper, who owned a garage, for £75. Harper did not realise that
Searle was not the owner of the car. Harper then spent £226 repairing the car and sold it on to
a finance company. It was held by the court that the car belonged to Bennett as Searle did not
have title and could therefore not transfer that title to Harper. For the same reason, Harper
could not transfer title to the finance company. Bennett was therefore able to recover the car
but had to compensate Harper for the work done to it.

The issue with nemo dat rule is that an innocent good faith purchaser can be unjustifiably
penalised. Because of the apparent harshness of the nemo dat rule, several exceptions have
been developed at common law and have been added by statute. All of the exceptions will
apply only in favour of a person who acquires the goods in good faith and without notice of the
rights of the original owner. The exceptions to Nemo dat Rule protect the innocent party. These
exceptions are:
 Estoppel
 Factors Act 1889 (Mercantile Agent)
 Voidable contract
 Seller in Possession
 Buyer in possession
 Hire Purchase

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The first exception is Estoppel also known as apparent authority and it is contained in s21(1).
An estoppel arises when the true owner leads the innocent purchaser to believe that the
unauthorised seller has the right to sell the goods. In such a case, the owner of the goods is
precluded that is estopped from denying the seller’s authority to sell. In order to be successful
in estoppel, the following are important:
(i) The true owner intentionally or negligently represents that the seller has the
owner’s authority to sell the goods or is acting as his agent to sell, the true owner is
estopped from denying that authority to sell and the buyer acquires good title
according to Henderson v Williams.

(ii) The innocent buyer acts in reliance on the representation.

Party A is an alleged seller and Party B is the buyer who buys in good faith. Z is the owner of the
property. A has represented Z as his agent and transfer property to B.
What was the conduct of the owner? Whether by words or conduct. He has given authority to
the agent.
There must be a representation, which may be by words or conduct. Merely handing
possession of goods and/or documents of title is usually not sufficient. The leading cases are
Moorgate v Twitchings, and Central Newbury Car v Unity Finance Ltd.
In Mercantile Credit v Hamblin, the owner of a car signed forms in blank, without reading
them, in the belief that they would enable a car dealer, who appeared to be respectable, to
raise money on the security of the car. In fact, the dealer fraudulently used the forms to sell the
car to a finance company.
The Court of Appeal held that a duty of care existed between owner and the finance company,
but that there was no breach of that duty because she knew the dealer and reasonably believed
him to be respectable, so that it was not negligent for her to sign the forms in blank

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The second exception is Factors Act 1889 (Mercantile Agent). A mercantile agent is an
agent who, in the customary course of business, has authority/consent to sell or to consign
goods for sale or to buy goods or to raise money on the security of goods. Hence, where the
mercantile agent has acted with the consent of the owner and in the course of business, the
innocent purchaser acquires good title to the goods.
According to s2 of Factors Act 1889, the mercantile agent disposes goods to buyer if:
 There is the principal’s or owner’s consent
 Acting during the normal course of agency (business)
 The buyer is acting in good faith
A mercantile agent is an agent who is entrusted with the possession of goods or documents of
title to goods and who is allowed to dispose of them, either in the agent’s own name or as a
principal.
Under s2(1) of the Factors Act 1889, a sale shall be as valid and it must be expressly authorised
by the owner of the goods:
 The disposition is by a mercantile agent according to Jerome v Bentley

 The mercantile agent is in possession of goods or of the documents of title to goods

with the consent of the owner.

The owner must have specifically consented to the person having possession in their
capacity as mercantile agent and not in some other capacity (for example, handing over
goods for repair).

The problem for the buyer is to know in what capacity the agent received possession of
the goods.

 The disposition is made when acting in the ordinary course of business of a mercantile
agent.

 The person acquiring the goods under the disposition must have acted in good faith and
without notice of the mercantile agent’s lack of authority as per Heap v Motorists’
Advisory Agency.

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The third exception is Voidable contract which are valid agreements but where one party or
both parties have failed to disclose a material fact (such as mistake, misrepresentation or
fraud), there has been undue influence or duress or one party’s legal capacity to enter the
contract is questionable.
Voidable contract  at the very start, the good is defective
Under s.23, the seller of goods has a voidable title to them, but his title has not been avoided at
the time of the sale, the buyer acquires a good title, provided he buys them in good faith and
without notice of the seller’s defect of title according to Cundy v Lindsay.
There are many illustrations of a voidable contract involving misrepresentations as to identity.
To take one example, in Kings Norton Metal v Edridge, a manufacturer of metal received an
order from ‘Hallam & Co’ and in consequence sent goods. It turned out that ‘Hallam & Co’ did
not exist. The rogue resold the goods. It was held that the intention had been to contract with
the writer of the order, and, although this had been induced by a fraudulent misrepresentation,
that only made the contract voidable. Since it had not been avoided before the goods were
resold to a third party, title passed to the latter.
If the contract is merely voidable, the original owner (O) must communicate their intention to
rescind to the first buyer [Seller-(S)] within a reasonable period of time, and they cannot do this
if they have done anything to affirm the contract with full knowledge of the relevant facts.
Where S is a rogue, O is likely to face some difficulty in communicating their intention. In Car
Finance v Caldwell, it was held that the true owner need merely take such steps as the
reasonable owner would take to recover the goods. Caldwell, a car owner who had been the
victim of fraud, informed the police and the Automobile Association. After doing these things,
the car was sold by the rogue to a car dealer.
The dealer had had previous dealings with the rogue, which ought to have enabled them to
infer that this transaction was fraudulent. The dealer then sold the car to a finance company,
which bought in good faith and without notice. The court must be able to discern that it was
the intention of the original owner to rescind the contract and that this intention was formed
before the resale took place. Therefore, in Caldwell notification to the police and the
Automobile Association provided sufficient evidence.
Although s.23 states that the new buyer will not acquire title if they bought with notice of the
voidable contract, this does not amount to a requirement that the original owner communicate
their intention to rescind to the new buyer before the contract.
In other words, there are two separate possibilities in s.23: first, that the original owner
rescinds the contract before the resale and secondly, that the new buyer is aware of the defect
in the seller’s title at the time of the resale.

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Where the parties contract in a face to face transaction, the law raises presumption that the
parties intend to deal with the person in front of them, not the person they claim to be. Seller
cannot recover its goods. In contrast, when contract is made not face to face, then the chance
exists for seller to recover its goods.
Summary: The alleged seller A transfers title to B, the buyer who is of good faith and Z is the
owner.
 The Buyer is of good faith
 Before the contract is made, the title was voidable at the very beginning.  The seller is
a rogue.
 Notice that the title was defective
Merely voidable: Party Z, the original owner must have taken step to rescind.

Moreover, the fourth exception is Seller in Possession. According to s24 of SGA, if property
in the goods has passed to B, but A remains in possession of the goods or remains in possession
of the documents of title and sells them to C who purchases in good faith. Without notice of the
sale to B, title passes to C, leaving B with only an action for breach of contract against A
Possession includes where goods are not in the physical possession of the seller, but are under
their control: for example, goods held by a warehouse owner to the order of the seller. It is
sufficient if the seller remains continuously in possession of the goods that he has sold to the
purchaser according to Worcester Works Finance Ltd v Cooden. The possession should be
continuous and the seller must have control over the property and title. Lord Denning thought
the section 24 might not apply where the seller’s possession had not been continuous and the
case is Pacific Motor v Hire Finance. Basically, a seller who is in possession of the goods that he
sold, can sell them again to a second buyer and that buyer can acquire a good title if he receives
them in good faith and without notice of the first sale. Here the possession of goods is to be
taken as prima facie evidence of ownership. Here the first buyer can bring an action for breach
of contract against seller.
For the second buyer to acquire good title, the seller must deliver possession of the goods or
documents of title: merely contracting a second sale is not sufficient to give title to the second
buyer. In Michael Gerson (Leasing) v Wilkinson [2001], machinery was sold to a finance
company and leased back to the seller, who then sold it to a second finance company and
leased it back. At all times the machinery remained in the possession of the seller.

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3 parties:  Seller (A) holds possession of good (property) or title.

A transferred property to B.
A sells property to C who purchased in good faith without notice of the sales to B.
 C Purchases in good faith
 Without notice of sale to B
 A delivered possession of title to C

Furthermore, another exception is Buyer in possession. In this situation the buyer has
acquired possession of the goods and sells to a second buyer. This exception permits a buyer
who has been allowed by the seller to take possession of the goods or documents of title
before property has passed to resell the goods. The new purchaser who takes the goods in
good faith (bona fide) and without notice of bad faith (mala fide), will obtain a good title. Here,
there is no need to prove Good faith.
In P4 Ltd v Unite Integrated Solutions (2006), there must be the following requirements:
1. a delivery under a disposition (s.25) or agreement for a disposition (s.9)
2. the recipient had no notice of any right of the true owner
3. the recipient acted in good faith.

Seller  sold/transferred 1st Buyer  resold to  2nd buyer (in good faith)
1st Buyer:
 The buyer has possession
 He is in good faith
 Without consent of owner/seller
The title is with the 1st buyer and the title is not defective + The seller has told him not to sell
unless given notice.
Can the 1st Buyer sell property without consent of owner/seller?
 He cannot sell because there is a Lien or a reserve with the seller The seller told the
buyer 1 that he cannot sell the good because there is a lien on the property.
 The 1st buyer is just acting as an agent
 The 1st buyer should not sell the good to the 2nd buyer without the consent of the seller.

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The last exception is Hire Purchase. A bonafide purchaser of only from a person in possession
under a Hire Purchase agreement or conditional sale agreement obtains good title. The onus of
proof is on the purchaser to prove that he bought the car for example in good faith. The Buyer
must prove that he buys in Good faith.

In conclusion, we can reasonably say that although the exceptions do go some way to limiting
the harshness of the nemo dat rule, there is a need for further reform in the area to ensure that
conflicts between owners and purchasers are resolved fairly.

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