The Seller’s Right to a Deduction for Use: Under Challenge?

Two recent developments have both raised the issue of whether or not a seller can impose a charge on consumers for any use of goods that has been enjoyed by the consumer, prior to returning the goods in question.  Where, for example, a purchaser takes delivery of a car which breaks down after two weeks, as a result of a fault which renders the car not of satisfactory quality under section 14 of the Sale of Goods Act 1979, the purchaser is entitled to rescind the contract.  The question then arises as to whether the seller can nevertheless make a charge for the use of the car that the consumer has enjoyed for the two week period prior to rescinding. 

This question is even more pressing for sellers who operate by way of a distance selling contract, since purchasers under such contracts are entitled to cancel the contract for no reason at all (i.e. there is no requirement that the goods be faulty) and receive a full refund of the purchase price.  Under the Distance Selling Regulations (SI 2000/2334, implementing the European Directive on distance contracts, 97/7/EC), this right of cancellation lasts for seven days from receipt of the goods, but it is extended where the purchaser is not informed of the right.  The length of the extension varies from Member State to Member State:  in the UK the maximum period for cancellation is three months and seven days, whereas it extends indefinitely in Germany until notice of the right to cancel is given to the consumer. 

This right of cancellation can result in a situation where a purchaser receives a book from an online retailer and is not informed of his right to cancel, thereby extending the cancellation period, such that it would be possible for him to return the book two months later, and cancel the contract – claiming his money back.  Since he could easily have read the book in this period, is the e-tailer entitled to deduct an amount to cover the use and benefit of the book enjoyed by the consumer in this period?

The position in Scots law is currently that the retailer is entitled, where the contract is rescinded, to make a deduction for the value of the goods used.  A recent Joint Law Commission Consultation Paper (LCCP 188/ SLCDP 139 on Consumer Remedies for Faulty Goods) has, however, assessed the value of this right.  It concludes that it rarely used, perhaps because of retailer and consumer uncertainty as to its extent and operation.  The Consultation Paper concludes that the right of a retailer to seek a deduction for use should be abolished, and seeks views on this conclusion.  The final outcome of the consultation is awaited.

In the meantime, however, a recent opinion of an advocate general of the European Court of Justice lends support to the view that a deduction for use should no longer be seen as part of a retailer’s weaponry against consumers.  In Pia Messner v Firma Stefan Kruger (Case C-489/07), this question arose in the specific context of the Distance Selling Regulations.  The advocate general concluded that it is not possible for e-tailers to make such a charge for use of the goods prior to cancellation.  This is because, under the Distance Selling regulations, the e-tailer can only charge the consumer for the cost of returning the goods, and may not make any other charge.  Allowing the e-tailer to levy a fee for the value of the used goods would equate to such a charge or penalty. 

Until such time as the final ECJ decision is available and the outcome of the Joint Law Commission consultation paper is known, the position remains unclear as regards retailers and e-tailers, but it looks as though there could be movement on both fronts in the near future.

The effect of illegality in contracts/trusts/tort

On 23 January 2009 the (English) Law Commission published its Consultative Report on the Illegality Defence (available on  This report has been long awaited, the original consultation papers being published in 1999 (Illegal transactions: the effect of illegality on contract and trusts Consultation Paper 154) and 2001 (The illegality defence in tort Consultation Paper 160).  According to the Law Commission Press Release ( the Commission has departed from its original recommendation which envisaged the introduction of a structured discretion for the courts.  Clearly, this was not attractive to all those who responded. Rather, the Commission now appears to advocate a more ad hoc approach.  Quoting from the press release:

 "Kenneth Parker QC, the Commissioner leading the project, said:
“The diversity in circumstances where this issue comes into play makes this a
very difficult area to navigate. In some cases, the claimant’s offence may be
trivial and have nothing to do with the claim. In others it may be very serious
indeed and be inextricably linked. In most cases the courts weigh policy
arguments to provide a fair result. However, their task is made more difficult
by the perceived need to abide by detailed and ostensibly rigid rules.
We believe that judges should base their decisions directly on the policies
that underlie the illegality defence and explain their reasoning accordingly.
We have made proposals on what those policies should be and welcome
views on our suggestions. The most important thing is that the law is fair,
should deter illegal conduct and should prevent a claimant from profiting from
his or her wrongdoing. An illegality doctrine should maintain public confidence
in the integrity of the legal system. ”

The consultation period closes on 20 April 2009.  

This consultation does not, of course, embrace Scots law.   The effect of illegality in Scots law is woefully under-researched.  The possibilty of legislation in England should lead us to reconsider this topic in this juridiction, remembering that the Scottish Parliament has competence to legislate in this area.  The legal foundations in the two countries are different, particularly when it comes to enrichment remedies which apply when a contract is found to be affected by illegality, and the effect of this finding on the transfer of title to property.  Perhaps the Scottish Law Commission could be persuaded to include this subject in its Eighth Programme of Reform.   


Amsterdam Book Launch of The Unauthorised Agent: Perspectives from European and Comparative Law (Cambridge University Press, 2009)

On Saturday 10th January 2009, Laura Macgregor gave the keynote presentation at a symposium which celebrated the publication of her book "The Unauthorised Agent: Perspectives from European and Comparative Law" which she co-authored with Danny Busch. The symposium was hosted by the international law firm De Brauw Blackstone Westbroek where Danny Busch works as a practising lawyer. The symposium and book launch also acted as an 'away day' event for members of the Edinburgh Centre for Commercial Law who attended to support Laura.

The distinguished academic Professor Reinhard Zimmermann of the Max Planck Institute for Comparative and International Private Law in Hamburg, Germany acted as the Chairperson. Laura Macgregor and Danny Busch began the symposium by exploring the focus and purpose of the book, namely a comparative examination of the legal situation created when an agent acts without authority – an issue which is an extremely important issue in agency law. Laura and Danny went on to explain that the analysis in the book is divided into three sections: apparent authority, ratification and the liability of the falsus procurator. The point was made that the book adopts a truly unique and wide-ranging comparative perspective with contributions drawn from many different legal systems, providing the opportunity for analysis of the European common law/civil law divide. The analysis in the book extends beyond Europe, however, taking into account the mixed legal system of South Africa, as well as the United States. Finally, there is a useful consideration of the Principles of European Contract Law and the UNIDROIT Principles of International Commercial Contracts 2004.

Laura's and Danny's introduction to the book was followed by presentations by the distinguished academics Professor Francis Reynolds FBA (Fellow of Worcester College, Oxford University and Honorary Bencher of the Inner Temple), Professor Deborah Mott of Duke University and Professor Rick Verhagen of Radboud University, Nijmegen. Each of the speakers underscored the invaluable nature of the range of analysis in the book for those interested in the study of comparative agency law and the harmonisation of European Private Law.

Offside traps – Gibson v Royal Bank of Scotland [2009] CSOH 14

The decision of Lord Emslie last week in Gibson v Royal Bank of Scotland [2009] CSOH 14 is the latest in a line of cases relating to the so-called "offside goals rule".  The case law in this area stretches back to the 1580s (Stirling and White v Drummond (1582) Mor 1689) but until relatively recently the cases had not been subject to detailed systematic analysis.

However, in recent years we've had detailed consideration by Professor Reid, The law of property in Scotland (1996) paras 695 – 700; Professor Carey Miller and David Irvine, Corporeal Moveables in Scots law (2nd edn, 2005) para 8.31, Ross Anderson in a valuable article "Offside goals before Rodger Builders" 2005 JR 277 (and an updated version in his Assignation (2008) paras 11-04 – 11-31, as well as my own discussion in 2002 JR 291 and in Professor McDonald's Conveyancing Manual (7th edn, 2004) paras 32-51 – 32-62.  Identifying the historical roots, the current conceptual underpinning, and the parameters of the application of the rule has not proved straightforward.  The work of Ross Anderson has proved particularly helpful for the historical development of the rule – but as that history may have been forgotten during the development of the case law the current conceptual basis and parameters remain nebulous.  At times the description by Professor Lubbe of the South African equivalent – that it is a "doctrine in search of a theory" (1997 Acta Juridica 246) – seems most appropriate.

And, where there is uncertainty as to the conceptual foundations there are risks.  In a famous essay the late WA Wilson wrote, "A legal system which has no doctrinal foundation must drift.  It may be under the delusion that it is proceeding in the light of pure reason."  (in "the importance of analysis" in Comparative and Historical Essays in Scots Law (eds Carey Miller and Meyers, 1992).  The statement is equally applicable to individual rules.

In Gibson the Gibsons sought reduction of a standard security granted by their predecessor in title Mr McAllister (first husband of Mrs Gibson) in favour of the people's bank, sorry the Royal Bank of Scotland.  McAllister had earlier agreed to grant the Gibsons an option to purchase the property, and had in the interim granted them a lease.  The security was granted in January 2006, the option had been exercised on 2nd March 2005 with a date of entry of 8th February 2006.  The Gibsons argued the bank was in bad faith and the security could be struck down.

 Lord Emslie presented the case as a conflict between the principle of transacting on the faith of the registers in property law, and the principle of fair dealing in contract law.

The bank in supporting their case that the action of reduction was irrelevant argued that for the offside goals rule to apply,

"there should be in existence a pre-existing right in favour of another; that that right would be breached by the transaction in question; and in particular that the right in question must itself be a real right, or at least one capable of being made real. " (para [13]

And accordingly mere personal rights could not found an action under the offside goals rule.  The bank then argued that the option was a mere personal right, and suggested that as an option was not a personal right capable of immediate conversion into a real right (but rather a right to enter a contract of sale – or a personal right to a personal right to a real right).  To this end the bank relied on Wallace v Simmers 1960 SC 255 and the two recent cases that followed it – Optical Express (Gyle) Limited v Marks & Spencer plc 2000 SLT 644 ; and The Advice Centre for Mortgages v McNicoll 2006 SLT 591.  The latter case may have been thought to particularly support the bank's case being an instance where the court refused to apply the offside goals rule to allow an option to be enforced (albeit an option granted by the then owner's predecessor in title), and where the Lord Ordinary (Drummond Young) disapproved Davidson v Zani 1992 SCLR 1001, the only authority which appeared to suggest that the holder of an option to acquire would benefit from the rule.

The Gibsons argued that the case should go to proof before answer, stressing that it was not necessarily irrelevant.  They had argued that the option had been exercised prior to the grant of the standard security thereby equating the Gibsons' position to that of the holder of concluded missives to acquire the property (a personal right capable of being made real) and thus within the limitations apparently set by Wallace v Simmers.

On that basis alone the Gibsons could be thought to have sufficient for the case to go to a proof before answer and the matter could potentially have been disposed of at that point. 

However, they argued further points.  They suggested that the limitation in Wallace v Simmers was not consistent with prior and subsequent authorities.  The argument was summarised by Lord Emslie as follows,

"The argument here rested on three broad propositions, namely (i) that a property right granted in breach of any pre-existing contract or other obligation was voidable at the instance of the creditor in that obligation if the grantee knew or ought to have known of the obligation (or if the subsequent grant was not for value); (ii) that the rationale for this rule was that no-one was entitled to grant a subsequent right in breach of a pre-existing obligation: the granter would be acting "fraudulently" in that regard, and if the grantee knew or should have known of this he must be deemed an accomplice to the fraud and to have acted in bad faith; and (iii) that there was no requirement in law for the pre-existing right or obligation to be real or capable of being made real. " (para [26])

And while accepting the decision in Wallace v Simmers (which involved a competition between a licence (a personal right to occupy property) and a sale) suggested that the approval for the decision in Trade Development Bank v Warriner and Mason 1980 SC 74 actually came in a case which did not support the main thrust of Lord President Clyde's decision in Wallace.  This is because on the facts of Warriner and Mason the court applied the offside goals rule to a case where a personal right to prohibit the grant of a lease was upheld.  Hence, the right benefiting from the offside goals rule there was not a personal right capable of being made real.

The problems that Warriner and Mason causes for establishing the parameters of the offside goals rule have been recognised since the decision was reported.  Professor Reid was originally very critical of the decision for that reason in his article "Real conditions in standard securities" 1983 SLT (News) 173 and 189, and in the Conveyancing Manual (at para 32.55) I suggest that it is a case that stands alone and may therefore "not truly be an illustration of the doctrine" – suggesting instead that  it might be an example of a general principle from the law of rights in security.  The roots of the Gibsons argument can be seen in Professor Reid's Law of Property in Scotland para 698, n 13 where it is suggested that Warriner and Mason contradicts the case and consequently Wallace may be limited in scope.

Having stressed that the "Personal right capable of being made real" point from Wallace may not serve as a limitation on the rule the Gibsons then point out that various texts suggest that options are covered by the rule – including Professor Reid's discussion in The Law of Property in Scotland at para 698, n 4.  I have taken a similar view previously in the Conveyancing Manual at para 32.62 (2).

The Gibsons argument was therefore summarised with the following proposition,

"that the bad faith exception could be prayed in aid by any party whose antecedent rights were compromised by a subsequent recorded grant.  Expressions of opinion in "double grant" cases, where prior rights were in fact "… capable of being made real" should not be read as imposing a universal limitation in all cases involving heritable transactions. Up to and including Rodger (Builders) in 1950, neither case law nor academic writings supported any such limitation. "

Lord Emslie decided that the case should go to proof before answer and deals shortly with the suggestion that the Gibsons case is irrelevant.  He points out that if the Gibsons prove all they aver,

"In terms of contractual significance it is in my view hard to differentiate an exercised, although unrecorded, option to purchase heritable subjects, or an asserted right of pre-emption for that matter, from completed missives of sale, and I am unable to accept that the holder of any such rights should in law be held powerless to challenge bad faith encroachment. " (para [36])

And that the second grant is a right in security rather than a sale does not matter.  Such a view is not controversial.  The line of cases providing that the offside goals rule applies where there is a personal right to acquire in favour of A followed by the grant of a subordinate real right in favour of B that would encumber the title of A when B completes his or her real right first can be traced back to Bouack v Croll (1748) Mor 1695 (a competition between a transfer (an assignation of lease) and a sub-lease) and is supported by the more recent decision of Trade Development Bank v David W Haig (Bellshill) Ltd; and Trade Development Bank v Crittall Windows Ltd 1983 SLT 510 (where the competition is between a transfer (an assignation of lease) and the grant of a standard security).  And indeed Lord Emslie notes the similarities between Gibson and Crittall Windows at paras [39] and [40]. 

He suggests at para [43] that a universal rule to cover the instances where the offside goals rule applies would be difficult to formulate (the case does not refer to the instances of competing rights in security in argument – but the formulation of any general rule somehow has to reconcile the cases of Blackwood v Creditors of George Hamilton (1749) Mor 4898 and Leslie v McIndoe's Trustees (1824) 3 S 48 – which suggest (I think correctly) that the offside goals rule does not apply to competing securities with the Scotlife Home Loans cases for example at 1994 SCLR 791).

Lord Emslie then seem to initially support the rationale underlying the approach in Wallace

"Recognising that the settled general rule is designed to protect an acquirer of heritable rights who, in good faith, relies on the face of the public records, it may well be reasonable to require that a competing prior right should itself be of a kind potentially capable, in due course, of affecting these records in some relevant way. According preference to known rights which could never do so might effectively subvert the settled rule, and in my judgment none of the cited authorities can be understood as supporting an approach along such lines. " para [44]

And indeed notes in his final observations that he would favour an approach midway between the two extremes suggested by the parties,

"With these considerations in mind I would not, if pressed, have been inclined to support either party's submissions to their fullest extent. In particular, I would have declined to accept the pursuers' contention that the Wallace limitation had no place in our law, and that mala fide knowledge should be a valid ground of reduction in any case where a prior right (of whatever nature) was compromised by a subsequent transaction. Conversely, I would not have been inclined to uphold the Bank's contention that the Wallace limitation should be construed and applied so narrowly as to deny any possibility of protection to prior rights unless these could immediately be "… made real" by the granting and recording of a disposition. In my view the authorities tend to support an intermediate position whereby, consonant with the established general rule, the bad faith exception may be applied in a wide range of different circumstances. It would be unusual (and undesirable) for an equitable exception to be more rigidly confined, and it is perhaps only where prior rights are not the subject of any supervening breach of contract, or concern a different granter or different property, or are of a kind which could never relevantly affect the public records, that serious continuing problems in this area may be expected. " (para [49])

Lord Emslie then suggests that there is no great unifying theory, that the parameters of the offside goals rule cannot be readily and neatly identified.  This may be down to the historical development of the rule, and the doctrinal shift (particularly during the Trade Development Bank cases) when the roots of the rule were to some degree forgotten and the courts were seeking a conceptual justification for the doctrine.  It may be down to the transplantation of an apparent general contractual principle of fair dealing in good faith into a property context (relied on in Crittall Windows and supported by Lord Clyde in the later House of Lords decision of Smith v Bank of Scotland 1997 SC (HL) 111) when property law had long recognised – not an overriding principle of good faith, but a recognised principle penalising bad faith (see for example, Lord Braxfield in Mitchells v Ferguson (1781) Mor 10296 and the notion that "though mala fides [bad faith] may cut down a title, no bona fides [good faith] can, of itself, create a right.").  It may simply be that the courts like to hold in reserve a flexible and equitable doctrine that can be used in property cases to penalise rogues and others through the application of what could be called interstitial justice. 

It remains to me surprising though that as the Scottish cases in this area become more fluid, and less predictable, English law which has long had a similar principle, the doctrine of notice, restricts the application of that principle in order to prevent the circumvention of their system of land registration.