Buyer Beware! When does a buyer have notice of third party rights?
The "buyer beware" principle has long been established in English law, although, today, buyers are not as much at risk as they once were, owing to changes in the law.
The recent case of Carlos Soto Sau and anor v AP Moller-Maersk AS  EWHC 458 (Comm) demonstrates the lengths that buyers are expected to go to "be aware" of anything that affects the goods they are buying, and subsequently, their legal ownership.
The case involved the shipping of frozen swordfish to Spain. On arrival, the swordfish were considered unfit for human consumption and were subsequently rejected. The shipper, PT Awindo International ("Awindo"), had agreed to sell the cargo to a supplier, who then agreed to sell to the eventual receiver of the cargo, Carlos Soto Sau ("CSS"). The contract between Awindo and the supplier contained a rejection clause that stipulated if the goods were rejected on arrival, the purchase price would be refunded; the goods would remain in the legal ownership of Awindo. The contract between the supplier and CSS did not contain such a clause. CSS received the cargo and sold it off as salvage, and, in doing so, believed it was the legal owner of the goods. The question arose as to who legally owned the goods and, therefore, who had a right to sue the seller Moller-Maersk AS ("Maersk") for the defective goods.
The High Court considered whether CSS had notice of Awindo's third party rights which, if it did, meant that CSS had never obtained legal ownership of the goods and was therefore precluded from suing Maersk. The High Court held that a buyer must have actual notice of third party rights, meaning that the matters must be brought to the buyer's attention and the buyer must have actual knowledge of them. The test is an objective one: if it can be said that a reasonable person in all the circumstances would have actual knowledge of the matters, then the buyer is on notice of such third party rights. The buyer cannot deliberately take no notice of matters that it would usually have knowledge of. However, the buyer is not expected to read in detail documents that it would not normally read.
Awindo's third party rights were set out in the packing list provided to CSS for the goods. The High Court held that CSS did not have actual notice of these rights because it can only be expected that the packing list was used for confirming the quantity and weight of the goods, and such rights were not alerted to CSS. As such, CSS had acquired legal title to the goods free from third party rights and was, therefore, entitled to damages from the ultimate seller, Maersk.
Consumer law has moved on from the onerous principles previously imposed on buyers, but it is important to note from this case that buyers cannot turn a blind eye to matters that would usually put them on notice.
It remains that it is the buyer's duty to prove that it purchased goods or services in good faith, for value and without notice of any third party rights.
For more information, contact Jan Marzec.