Consumer sales contracts: rules on the transfer of ownership of goods

Consumers often pay for goods in advance of receiving them, for instance, when buying online, ordering an item of furniture in a shop, or buying a gift voucher. If a retailer goes into insolvency before the goods have been delivered, the consumer is left unsure as to whether they will still receive the goods they have paid for. This would depend on whether ownership of the goods has passed to the consumer, which is determined by the transfer of ownership rules. The current rules are contained in the Sale of Goods 1979 and are substantially the same as those in the original Sale of Goods Act 1893. The rules are complex, technical and rely on outdated language. Unsurprisingly, consumers find the rules difficult to understand.

When a contract of sale is formed (i.e. the timing of the contract) impacts directly on the transfer of ownership rules. This is because the rules are premised on the existence of a contract. Retailers, particularly online retailers, commonly seek to delay formation of a consumer contract until the goods are dispatched, or in some cases delivered, to the consumer. This practice has significant implications for the transfer of ownership: if the contract does not come into existence until dispatch, then there can be no transfer of ownership until dispatch.

In September 2014, the Department for Business, Innovation and Skills (now the Department for Business, Energy & Industrial Strategy) asked the Law Commission to examine the protections given to consumer prepayments and to consider whether such protections should be strengthened. The Law Commission issued a consultation during the summer of 2015 and published its Final Report, “Consumer Prepayments on Retailer Insolvency”, on 13 July 2016. The Law Commission made several recommendations, including reform of the transfer of ownership rules. In preparing its report the Law Commission considered a variety of prepayments made by consumers in advance of goods and services being provided, including Christmas savings schemes, customer deposits for goods and the purchase of gift vouchers, as well as prepayments for furniture or home improvement projects which require upfront payment for retailers to order from suppliers. The Government published its response in December 2018.

The Government had already published “Modernising consumer markets: Consumer Green Paper” in April 2018 to examine markets which were not working fairly for consumers, in particular, digital markets. A spate of retail insolvencies had left consumers without the goods they had paid for online. The Government said that the findings of the Green Paper would be considered alongside the Law Commission’s work, particularly as regards possible legislative changes.

On 27 July 2020, the Law commission published its consultation paper, “Consumer sales contracts: transfer of ownership”, containing draft legislation. If enacted, the reforms contained in the draft Bill would modernise and simplify the rules on when consumers acquire ownership of goods, including where they have ordered goods online or where a retailer goes insolvent before they have received the goods. The consultation closes on 31 October 2020.

The Law Commission believes that problems with consumer prepayments have become more urgent owing to the significant increase in online shopping prompted by the Covid-19 pandemic, which has also increased the risk of retailer insolvencies. It thinks it is time for the transfer of ownership rules to be modernised “so that consumers have clarity on their rights of ownership, especially in an insolvency situation”.

This Commons briefing paper, section 2, considers the formation of sale of goods contracts between consumers and traders. The current rules on transfer of ownership are outlined in section 3. It summarises the background to the Law Commission’s consultation (section 4) and the main provisions of draft Bill (section 5). In the process, it also considers how the question of ownership of goods in a sales contract would be determined under the draft Bill in the event of the retailer’s insolvency.