Commercial Law

Differences between non-consumer and consumer sales (SGA 1979 v CRA 2015)

1. SGA used to cover all sales, but CRA covered aspects for B2C contracts

2. While SGA 1979 covers all sales of goods, CRA 2015 is more comprehensive and covers goods, services, and digital content.

3. CRA 2015 provides a specific 30-day period for consumers to reject goods that don’t conform to the contract, unlike SGA 1979, with no defined time period.

4. Burden of Proof: In SGA 1979, after six months from the date of purchase, it was up to the consumer to prove that the goods were faulty at the time of delivery. CRA 2015 extended this period to six months, making it easier for consumers.

Definition of a sale contract

SGA 1979 s2(1) CRA 5(1)

Types of goods

Existing goods 

• Specific goods

• Unascertained goods

Future goods

Duties of the seller

s13-14 SGA 1979

Transfer of ownership

s16-19 SGA 1979

Transfer of risk

s7, 20, 32 SGA 1979. Generally risk passes with property

Frustration in SGA 1979 and common law

S 7 SGA 1979: When specific goods (not unascertained goods) perish without any fault by either party after the contract is made but before risk passes to the buyer. Contract is void if the goods perish under these conditions, discharging both parties from their obligations. eg.

Remedies

Buyer’s Remedies: s15B SGA 1979

Consumer Remedies: s20-23 CRA 20154 CRA 2015)

Types of insurance

Indemnity insurance v life assurance, Non-consumer v consumer

Indemnity insurance v life assurance

Indemnity insurance

• Insured is indemnified against loss, damage or destruction suffered uncertain to occur. 

Non indemnity insurance / life assurance 

• Where the insured event is certain to occur. However, the event’s precise timing is uncertain.

Non-consumer v consumer

• Consumer Insurance (CIDRA 2012): An individual purchasing insurance primarily for purposes unrelated to their trade, business, or profession.

• Non-Consumer Insurance (Insurance Act 2015): Policies entered into for business or trade purposes.

• Duty of Disclosure:

  • Consumer: The policyholder must take "reasonable care not to make a misrepresentation" to the insurer.

  • Non-Consumer: The insured must make a "fair presentation of the risk," including disclosing every material circumstance they know or ought to know substantially correctly.

• Remedies for Misrepresentation:

  • Consumer: If a misrepresentation is made, the remedy depends on whether it was deliberate/reckless or careless. Insurers may not be able to avoid a policy if the mistake was reasonable, as stated in.

  • Non-Consumer: If a breach occurs, the insurer can avoid the contract entirely, depends on what the insurer would have done had he known the true facts.

• Contracting Out:

  • Consumer: The protections under the Consumer Insurance (Disclosure and Representations) Act 2012 are mandatory.

  • Non-Consumer: The rules under the Insurance Act 2015 are generally default rules and can be contracted out.

Insurable interest: what and when

Life assurance

• Must have an insurable interest in the subject matter of the insurance: Life Assurance Act 1774 s1

• Except for your own life and spouse

• Interest must exist at the time when the contract of insurance was made

Indemnity Insurance

• Must be an insurable interest for a valid claim under an indemnity insurance: Marine Insurance Act 1906 s5

• A person has an interest where they have either a legal right in the property (or from a contract about it), or a practical stake in it (benefiting if preserved or suffer prejudice if damaged or lost.)

• Test: is there a close legal relationship between the insured and the subject matter?

• Insurable interest must exist at the time of the loss, probably at creation?

Disclosure: duty of fair presentation/to take reasonable care not to misrepresent + remedies

s3 Insurance Act 2015

1. Material Circumstances: s 7 2015 Act

2. What does the Insured Know or What Ought he to Know: s4-6 2015 Act 

3. Must be substantially correct: s7(5) 2015 Act

4. Excluded from the duty: s3(5) 2015 Act, supplementary s5-6 2015 Act and waiver

5. Consequences of Breaching the Duty of Fair Presentation: s8, Sched 1, s 16(2)-17 2015 Act

6. Consequences of breaching the duty to take reasonable care: s4 and Schedule 1 2012 Act

Duty of disclosure during the contract

Insurance is a contract “uberrimae fidei” (utmost good faith), obliged to provide information to his insurer before entering insurance. For non-consumer it’s duty of fair presentation

A breach of this duty = contract could be voided

Warranty

An observed promise made by the insured that can be (1) of fact as they stand or (2) of opinion (circumstances of the future). No longer possible to create a warranty as a result of a ‘basis of the contract’ clause: s6 2012 Act or s9 2015 Act

Warranty present facts

Statements of past or present facts can’t be contracted out of provisions in any insurance contract: s15-16(1) 2015 Act

Breach and its consequences

s10(2), 11 of 2015 Act

Insurance intermediaries: whose agents?

Commercial insurance can be arranged through intermediaries. Distinction between independent intermediary (broker, acts for the insured) and tied agent (acts for the insurer). s9 and Schedule 2 2012 act

Personal security

Creditors go after the assets or cautions, is cautionary security.

• A guarantee to back someone's debt if they fail (payment or performance of obligation)

• Creditor has rights against debtor and cautioner

• Enforced by court action (suing for payment)

• Ranks as an unsecured claim in insolvency

Real security

Creditors go after the assets or cautions, is asset security

• (1) proper from (2) improper asset security (sometimes referred to as quasi-securities)

• Debtor retains ownership

• Creditor holds a subordinate real right in the asset

• Attached to specific property that can be realised (sold)

• Survives insolvency (secured creditor status, prioritised)

Proper security

(1) the real right of ownership (debtor), (2) the (subordinate) real right of security (creditor)

Structure

• Debtor remains owner

• Creditor gets a subordinate real right (security right)

• Asset encumbered

Nature of rights

• Debtor: real right (ownership)

• Creditor: real right in security (jus in re aliena)

Legal consequence

• Creditor can sell the asset but doesn’t own it

Improper security

Creditor’s ownership. Debtor has no real right, but has a personal right to be transferred ownership when the debt is extinguished

Structure

• Creditor becomes owner of the asset

• Debtor only has a personal right to get it back after payment

• Asset transferred

Nature of rights

• Creditor: real right (ownership)

• Debtor: personal right (retransfer later)

Accessoriness

A right in security is accessory to the underlying obligation. The debt can exist without the right in security, but the right in security cannot exist without the debt.

Publicity

Possession (Corporeal Moveables)

• Physical act that shows who owns or holds rights to an asset.

• Delivery of possession (traditio) is required

• Pledge/lien

Registration (Immoveable Property & Securities)

• Registration in a public register is the primary method of publicity

• Standard security/ floating charge

Specificity

The property in question must be sufficiently identified.

Ranking (prior tempore + exceptions)

On a first come first served basis (prior tempore potior jure).

A right in security that has a lower ranking is said to be “postponed”, and a right in security that has an equal ranking is said to rank “pari passu”.

Fixed securities rank over floating charges.

Catholic and secondary creditors

Catholic creditor should act in such a way as to leave the largest possible sum for the secondary creditor. Don’t apply where the catholic creditor has a floating charge.

Transfer (assignation)

Unilateral transfer of the claim, the accessory follows the principal. MTA

Enforcement

Security can generally be enforced by sale, exceptions: floating charge and landlord’s hypothec

• Creditor’s obligation to get best price. 

• Any balance is returned to debtor, or to other secured creditors.

• The principal exception to this is the floating charge where the creditor has no power to realise the asset.

Caution general concept

Guarantee for a person to pay the debt of another if the latter fails to pay the creditor by payment of a debt or the performance of another obligation (eg to build something).

Cautioner’s rights upon enforcement

Right of relief: the right to get payment from the principal obligant, if cautioner has paid, creditor must assign the right to enforce the debt and any existing securities to the cautioner

• Division: a co-cautioner is only liable for a pro rata share of debt and can only be asked to pay if all creditors asked to pay (can be excluded by agreement)

• Discussion: the cautioner only had to pay when the creditor has taken all reasonable steps to enforce the debt against the principal obligant. Only available if contracted for, can be excluded by agreement

Extent of cautionary obligation: cautioner’s ranking in bankruptcy (whole debt subject to a limit v part of the debt)

Cautioner has right to rank in bankruptcy of principal obligant (if the cautioner has paid the debt in full). AKA If the principal debtor is bankrupt, and the cautioner pays in full, the cautioner can rank on the principal debtor’s estate. 

• The cautioner can’t rank in the bankruptcy of the principal obligant if the creditor has ranked for the debt in the bankruptcy (double ranking)

Real rights in security distinctive rules for each (important developments in MTA 2023

Corporeal moveables – possessory (pledge and lien, s16, 42, 64) and non-possessory securities (standard securities, landlord’s hypothec, and the statutory pledge, s46)

• Pledge → requires possession

• Lien → arises from possession (no sale)

• Landlord’s hypothec → arises by law

Heritable property

• Standard security → requires registration

Incorporeal moveables

• No true security

• Use assignation + intimation

Quasi-securities: assignation in security

Assignation in security is an improper security right which involves the transfer of the right to the creditor. MTA 2023.

The security provider is left with a personal right to receive a retrocession when the debt is paid. As the creditor is the “owner” of the incorporeal moveable right, she has the right to receive payment from the debtor. No court order is required. 

• Express Securities = improper security of assignation in security or statutory pledge (for some incorporeals) 

• Tacit Securities = none 

• Judicial Securities = arrestment

Quasi-securities: trust (Tay Valley)

Asset held by creditor on trust → functions like security

• Debtor transfers asset; creditor holds as trustee

• Debtor keeps beneficial interest

• Not a true security (no subordinate real right)

Quasi-securities s62(4)

Sale and leaseback: If the transaction is designed to operate as a security, SGA doesn’t apply.

• Fall back on the common law, needs delivery to the creditor to effect a transfer of ownership

Company specialties: additional publicity requirements

Usual requirements for each right in security must be followed with additional publicity requirements: Registration

Floating charge meaning of ‘property and undertaking’

A charge over the entire company’s “property and undertaking” to secure a debt. s462(1) Companies (Floating Charges) (Scotland) Act

Creating a floating charge

s462 Companies Act 1985, writing to register in Companies Register

Floating charge invisibility period

Because the floating charge does not need to be registered within 21 days, there is an invisibility period within which other creditors are unaware of its existence.

Potential creditors might grant a right in security without any priority over the floating charge, detrimental to them

Floating charge attatchment

To enforce the charge, the charge attaches to the assets covered by the charge. Attachment by:

Liquidation: s463 CA 1985

Receivership: s53(7) IA 1986

Administration: Schedule B1, para 115(2) IA 1986

Floating charge ranking + NPC

s464(1) and (1A) CA, a charge can contain a negative pledge clause (NPC) which restricts the creation of any fixed or floating charge having priority over the floating charge 

• Any fixed or floating charge granted after a floating charge with a negative pledge clause (NPC) will rank after the floating charge with the NPC

Claims: when (proximate cause)

Loss can be claimed if proximately caused by one of the insured risks (dominant/real cause needed)

• The insured cannot deliberately cause the loss

If a fraudulent claim is made the insurer is not obliged to pay it and may recover any sums he has paid: s12(1-3) 2015 Act

How much for claims, damages

Indemnity Principle: Once proven the insured event has occurred and a pecuniary loss, over any excess agreed to bear himself has been suffered, the insured will receive the amount lost, except in life assurance or a “valued” policy where a fixed amount will be paid. Payment is the value of the insured’s loss (capped at policy max) at the market value of goods, but parties can contract its replacement or repair cost

Damages for late payment are allowed

• English law: The right to indemnity is seen as damages for breach, arises at the time of the loss, not when the claim is made or refused. 

• Scots law: The right to indemnity is seen as a contractual duty to pay a sum of money equivalent to the insured's loss, not damages for breach. 

No double recovery if he insures the same risk with two insurers under an indemnity policy

Doctrine of average if partial loss to an under-insured subject: pays only a proportion of the loss based on the sum insured and the actual value.

Claim consequences of payment

Subrogation: After the insurer pays the insured, the insurer can step into the insured’s shoes to use their legal rights to recover money from whoever actually caused the loss, money going to the insurer (to the extent of what they paid).

• Third Parties Right Act

Cautioner ranking rules different as between real and personal security

real security 

• If the cautioner has guaranteed the whole of the debt, subject to a limit, then the cautioner is not entitled to rank on the estate and is liable for any shortfall after the principal debtor’s bankruptcy. 

personal security.

• If the cautioner has guaranteed a part of the debt, the cautioner can pay that part and then rank on the principal debtor’s estate for that amount. If the creditor has already ranked on the principal debtor’s estate for the full debt, then it must give credit to the cautioner for that amount

Warranty Types

• Warranty as to present facts

• Warranty as to future facts

• Warranty as to opinions

Warranty as to future facts

Statements of future circumstances can be contracted out of s10-11 in commercial insurance provided the insurer complies with s17 requirements: s16(2) 2015 Act

Wreckage

If total loss is paid, then the wreckage of the insured object can become his property. 

Claim consequences of payment unavailable

Not available to contingency insurers eg. life insurers of a person killed in a car crash can’t claim against the person responsible for the crash.

insurer paying more the share of loss

If an insurer pays out more than his share of the loss, he has a right to recover the amount he paid out above his share from the other insurers