It is very easy for a person to assert they are an "innocent purchaser", but the law relating to title after the unlawful transfer of assets to a third party is complex and creates something of a minefield for lenders and finance houses. This article addresses some of the key legal points.
The starting point is "nemo dat quod non habet", which means "no one can transfer what he has not got" ("the nemo dat rule"). The nemo dat rule is enshrined in law by section 21(1) of the Sale of Goods Act 1979 (SOGA).
So far, so good, but what if the seller sells assets that they do not own to an innocent purchaser? The true owner may have a good claim against the fraudster (if they can be found and have the money to repay), but otherwise the asset may be the only hope of a recovery.
The nemo dat rule looks to protect the true owner of the asset, but there are several exceptions and the law has evolved over time to help innocent purchasers. The position was perhaps best explained by Lord Denning in Bishopgate Manor finance Corporation Limited v Transport Brakes Limited (1949):
"In the development of our law, two principles have striven for mastery. The first is for the protection of property: no one can give a better title than he himself possesses. The second is for the protection of commercial transactions: 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 times”.
Exceptions
The main exceptions to the nemo dat rule are:
- Mercantile Agent: This is where an agent of the owner has authority (real or apparent) to deal with the goods sold. The key requirements for this exception are that the agent must be in possession of the actual goods and/or the documents of title to the goods when he sells, and the buyer must acquire the goods in good faith, without knowledge of the seller's lack of authority. Importantly, the burden of proof rests with the buyer.
- The Innocent Purchaser Rule: The second major exception applies to motor vehicles only, purchased by private purchasers and is applied by s. 27 of Hire Purchase Act 1964. In broad terms, the first bona fide retail purchaser of a motor vehicle from a person in possession under a hire purchase agreement or conditional sale agreement, will obtain good title to the car. Note the exception only applies to the first innocent purchaser and doesn't apply to motor traders.
However, the innocent purchaser rule does not apply where the seller obtains possession of the vehicle by fraudulent means originally, for example using a stolen identity. "Fraud undoes everything", so that if the transaction starts with fraud, even an innocent third party purchaser will not take title from the fraudster.
The exceptions are complex and fact specific. In every instance, the assertion that someone is an innocent purchaser should be tested. Put simply, whenever an innocent purchaser asserts they have title, they have to prove it. With legal advice, lenders and finance houses can take steps to avoid falling victim to asset conversion and navigate the minefield.
