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Do you sell goods directly to consumers who prepay before delivery?

Components / 14 August 2020

Many manufacturers will produce goods to order, taking payment before delivery.  If you manufacture goods that are sold directly to consumers and are prepaid before they are delivered, you must be aware of potential changes to legislation that will affect when consumers acquire ownership of goods under a sales contract.  In this update we explain the background to the Law Commission’s recently launched consultation, the proposals, details of the consultation and next steps.

In 2016, the Law Commission made several recommendations to protect consumers against the undesirable situation whereby a retailer becomes insolvent after the consumer has paid for goods but before the goods have been delivered. Until now, those recommendations have not been implemented. However, in the face of the current pandemic there has been a sharp boom in online sales as well as an increase in retailer insolvencies. The draft Bill therefore seeks to urgently address some of these issues.

Consumers are mostly protected by the Consumer Rights Act 2015 (CRA). However, the existing law on the transfer of ownership of goods in consumer contracts is not contained in the CRA, but in the Sale of Goods Act 1979 (SGA). The Law Commission’s report highlighted concerns that the SGA is difficult for consumers to follow and is not suitable for modern retail transactions. The existing rules also currently do not distinguish between a buyer who is a consumer or a trader.  The draft Bill would amend the Consumer Rights Act 2015.

Key features of the proposals
Some of the key features of the draft legislation include:

—  New terminology – the draft Bill aims to modernise the language and ensure it is comprehensible to consumers;

—  Categorisation of sales contracts-  the draft Bill distinguishes between contracts where the goods are (i) identified and agreed at the time the sales contract is made (for example, items selected in a physical store or where there is only one specific item, such as a one-off antique, bought online; or (ii) not agreed and identified at the time the sales contract is made (for example items ordered online out of a retailer’s general stock);

— Different transfer of ownership rules for each category – different rules are proposed for the new categories of sales contracts – ‘goods identified and agreed’ will transfer to the consumer at the time the contract is made, whereas ‘goods not identified and agreed’ will transfer on the triggering of an event such as, delivery of the goods to a carrier for delivery to the consumer or being labelled with the consumer’s name in a way that is intended to be permanent (amongst several others). Different rules have also been suggested for foods manufactured to an agreed specification, for example, bespoke items; and

— Delaying transfer until receipt of full payment – currently a trader can use section 19 of the SGA to delay the transfer of ownership until it has received full payment, including in contracts with consumer. The draft Bill proposes to abolish this to protect consumers who pay substantial deposits prior to a retailer’s insolvency.

The consultation
The consultation closes on 31 October 2020. You can respond here.  After reviewing responses to the consultation, the Law Commission will finalise the text of the draft Bill and the government will decide whether to implement it.

Comment
The proposed changes will apply to any retailer or manufacturer which sells directly to consumers and so it is critical those businesses understand now how changes may affect them. These businesses should review their existing terms and conditions to make sure they comply with any new legislation which is brought in otherwise, for example, any contract term purporting to provide transfer of ownership at a later date than that provided by statute will be ineffective.

Our highly experienced Business & Finance teams can assist you with a review of your existing terms and conditions to ensure they comply with any new legislation. Our Disputes team has also worked on several cases relating to the SGA and ownership of goods, including emergency injunctions determining an urgent declaration in respect of ownership of high value goods. Please do get in touch if you need help.

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