Retention of title clauses: Lecture notes PDF

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Retention of title clauses: Lecture notes...

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Commercial Law 2016 Lecture 8 1

Retention of title clauses

Retention of title clauses

Most commercial contracts will involve the sale of goods to the buyer on credit terms and this means the seller is very vulnerable if the buyer becomes insolvent before he has paid the seller for the goods. The canny seller will therefore look for a way to hang on to ownership of the goods until the buyer has paid for them. This, in essence, is what a retention of title clause seeks to achieve i.e. the seller contractually retains ownership of the goods until he has been paid. If the clause works the seller is spared the problems which result when the buyer becomes insolvent. Without a retention of title clause the unpaid seller will rank very low in the statutory order for payment of an insolvent buyer’s debts under the Insolvency Act 1986. The first call on the buyer’s assets will come from secured and preferential creditors, the seller will join the other unsecured creditors to receive a very small, if not non-existent, payment, almost certainly a lot less than the amount owed to him by the buyer. You may see that retention of title clauses are also called reservation of title clauses or Romalpa clauses (based on the first case to consider their validity) in different text books. The different terms all mean the same thing - a clause in a sale of goods contract which seeks to extend the seller’s rights of ownership of the goods until he has been paid. We will look at the cases which have considered the validity of retention of title. There were a large number of cases in the 1970s and 1980s as the extent of the validity of clauses were explored, but there have been fewer cases in recent years as basic principles have now become established. The first case to consider retention of title was:

Aluminium Industrie Vaassen BV v Romalpa [1976] 1 WLR 676 The Plaintiff was a Dutch Company who supplied aluminium foil to Romalpa. The standard conditions of sale provided : (i) (ii) (iii)

that ownership of the foil was to be transferred only when the buyer had met all that was owing to the seller that the buyer was to store the foil in such a way that it was clearly the property of the seller until it had been paid for. that articles manufactured from the foil were to become the property of the seller as security for payment and that until such payment had been made the buyer was to keep the articles manufactured as ‘fiduciary owner’ for the seller and if required to store them separately so that they could be recognised.

The buyer was permitted to resell the goods provided that his claims against any such buyers were handed over to the seller. The buyer became insolvent owing the seller £120,000. The buyer still had £50,000 worth of foil and £35,000 representing the proceeds of sale, in a separate bank account. Held -The seller was entitled to recover both sums. The Romalpa case illustrates in a dramatic way the practical importance of having a retention of title clause. 2

Problems arising from the Romalpa decision

The simple reservation of title clause offers little problem where the contract goods remain in the buyer’s possession in an unaltered state. But many sellers, including the seller in Romalpa, have much more elaborate clauses. Since 1976, these clauses have been subject to a lot of litigation, and in many cases the courts have held that the clause is ineffective. To a large extent this is because the judges have felt that sellers have tried to do too much with

Commercial Law 2016 their clauses and thus have overreached themselves. However one point to note is that Romalpa remains good law in so far as a simple claim over the goods themselves supplied by the seller is concerned, provided that the seller has also included, within the retention of title clause, the right to enter the buyer’s premises to recover the goods (to avoid issues of trespass arising) and that the goods can be identified as having been supplied by the seller. If we look more closely at what the seller is trying to do we can see why so many of the later decisions have gone against them – in effect the seller’s practical objective is to create a form of security interest in the goods. Normally where someone tries to take a security against a company (e.g. a bank who has lent money to it) as a means of ensuring they get their money back, the Companies Act 2006 says that to be effective, that security has to be registered at Companies House. The purpose is to put other potential lenders on notice that someone has already lent money and taken some form of security. However, where a retention of title clause is upheld, the effect is the same as where someone has lent money and registered a security i.e. the seller gets his goods back, but without having the inconvenience and expense of having to register a charge. From the point of view of other potential lenders they can be deceived into thinking a company has more assets than it really does; in reality most of those assets may actually belong to the sellers of them under retention of title clauses. It is against this backdrop that we need to consider the judicial decisions following Romalpa. For convenience we will look at it in terms of the different kinds of retention of title clauses that sellers have tried to rely upon. 3

The all monies clause

Where there is a regular supply of the same type of goods from the seller to the buyer, it can be difficult for the seller to show which goods have been paid for and which remain unpaid. In consequence sellers began to provide that the buyer had to settle all indebtedness before any property in the goods could pass from the seller to the buyer. Such a clause is known as an ‘all monies clause’ and in principle, provided that the goods sold retain their identity and are still in the buyer’s possession, the seller is able to reserve title in all the goods sold by him to the buyer until all the prices due are fully paid. So where a seller makes regular deliveries to the buyer under contracts containing such a clause, the property in the very first delivery may be retained long after the buyer has paid the full price of that delivery, so long only as some part of the price of subsequent deliveries is not yet paid. The validity of such clauses was considered, albeit obiter, by the House of Lords in Armour v Thyssen Edelstahlwerke [1991] 2 AC 339 The House of Lords whilst upholding an all monies clause did not answer, as the facts of the case did not give rise to the problem, what the situation would have been if the seller had used the clause as a basis for repossessing paid-for goods as well as unpaid-for goods However, a recent decision of the High Court has held that an all monies clause was ineffective in the case of revolving stock: Bulbinder Singh Sandhu (trading as Isher Fashions UK) v Jet Star Retail Limited (trading as Mark One) (in administration) and others [2010] EWHC B17 The seller, Ishner Fashions UK (IF) supplied budget fashion clothing to Jet Star Retail Ltd trading as Mark One. IF entered into a contract that governed the terms on which IF would supply stock which included an "all monies" ROT clause. The buyer fell behind with payments to its creditors and went into administration. At the time it went into administration, its records indicated it held over 200,000 stock items purchased from IF. The administrators of the buyer sold all remaining stock following which IF brought a claim for the total value of stock sold. Held The retention of title clause in this case was ineffective and the seller’s claim failed. In this case, the ROT clause was part of a contract for the sale of stock that was designed for resale, as distinct from a sale of tools or equipment that the purchaser intends to use in its business. The court noted that contracts for sales of goods that are not destined for resale may often contain effective ROT clauses. In this case, the ROT clause was not effective, as it was inconsistent with the parties' clear intention that the stock be on-sold to customers.

Commercial Law 2016 4

Tracing proceeds of sale

In Romalpa one of the clauses claimed that the seller was entitled to any proceeds of sale of the goods supplied by him, in Romalpa there were proceeds totalling £35,000 and the seller was permitted to recover the full amount. The legal basis for the decision rested on the court in Romalpa recognising a fiduciary relationship (a form of trust) between the buyer and the seller, enabling the seller to trace and claim the proceeds of sale. However the Romalpa decision was overturned by the Court of Appeal in Borden v STP [1981] Ch 25 which stated that no fiduciary relationship existed as there was no evidence that the buyer was acting as the seller’s agent. The restriction of Romalpa was followed in Re Andrabell Ltd [1984] 3 All ER 407 and Pfeiffer (E) Weinkellerei Weinenkauf GMBH and Co v Arbuthnot Factors Ltd [1988] 1 WLR 150 so it seems settled law that a seller will never be able to trace into proceeds of sale regardless of what their retention of title clause might say. 5

Retaining equitable ownership

In some cases, the contract has provided that the buyer is to have legal ownership of the goods but that ‘equitable and beneficial’ ownership is to remain in the seller. Such a clause was considered in the following case: Re Bond Worth Ltd [1980] Ch 228 ‘Acrilan’ fibre was supplied by Monsanto to Bond Worth for use in the manufacture of carpets. The contract of sale provided that ‘equitable and beneficial ownership’ of the Acrilan should remain in the sellers until the price had been paid, or until prior resale, in which case Monsanto’s beneficial ownership was to attach to the proceeds of the resale. It was also stipulated that Monsanto should have the equitable and beneficial ownership in any products made out of the fibre. Held -The seller’s provisions were consistent only with the creation of a charge which was void for non-registration. Slade J - The legal and equitable interest had been transferred to the buyer with the buyer granting a charge in return. 6

Manufactured goods

Where the seller’s goods have been added to other goods, the seller can reclaim them if the goods remain in their original form, are readily identifiable and can be separated easily from any other goods: Hendy Lennox v Graham Puttick Ltd [1984] 2 ALL ER 152 The goods were diesel engines which were being used by the buyer for incorporation into diesel generating sets. The seller’s reservation of title clause was held to validly extend to the generating sets because the engines themselves remained readily identifiable because all had been provided by the seller and each had a serial number, moreover the engines were capable of being disconnected by a few hours work.

The position will be different where the goods supplied are irrevocably attached to larger goods or if they are fundamentally changed by the manufacturing process. It is a question of degree in each case whether the goods have been sufficiently altered to lose their identity: Re Peachdart Ltd [1984] Ch 131 The identity of leather supplied was lost when cut and stitched into handbags.

Commercial Law 2016 Borden v Scottish Timber products [1981] Ch 25 The identity of resin supplied was lost when incorporated in chipboard. The court took the view that the parties intended ownership to pass to the buyer when the goods entered the manufacturing process, so that any claim to the manufactured product would be ineffective as an unregistered charge. Modelboard Ltd. v Outer Box Ltd Chancery Division, 22nd September, 1992 [1992] BCC 945 The supplier of cardboard sheets was owed over £55,000 but all the supplied sheets had been processed into cardboard boxes. The supplier's conditions of sale provided that the buyer was entitled to process the sheets or mix them with other components provided that the resulting products were the property of the seller. Held The court was clear that this attempt to obtain rights over the boxes created a charge by way of security for sums owing rather than reserving title to the property. The seller had no absolute right to these boxes, its interest in the property would have been defeated by the box manufacturer paying the purchase price for the cardboard sheets. Failure to register this charge meant that it was void as against the bank's registered debenture. However, recent cases have begun to distinguish between situations of mixed storage with situations of mixed incorporation or consumption (the Borden and Peachdart scenario). Two recent cases neatly illustrate the point: Glencore International AG v Metro Trading International Inc (No.2) [2001] 1 Lloyds Report 284 The buyer was in the business of buying, blending and selling fuel oil. The buyer bought fuel and other oil products from various sources, blended it, stored it and then sold it. The buyer was in receivership. The seller had delivered oil products to the buyer. The oil had been mixed with other oil and subsequently formed part of consignments of oil sold to third parties. The seller claimed that the proceeds of sale were its property. Held that the co-mingling of the oil in storage with similar oil belonging to another claimant, or to the buyer itself, would not cause property to pass to the buyer (absent a clause in the contract to that effect) and that the contributors to the bulk would become co-owners of the bulk in proportion to the quantities of oil which they had contributed to it. Moore-Bick J. also held that where the oil had been blended with other products resulting in the “destruction” of the original product supplied, then title passed when the blending took place. The Glencore case neatly encapsulates the distinction between mixed storage and mixed incorporation or consumption. Where there had been mixed storage, title had not passed and the seller was entitled to a share of the mixed pool. Where there had been mixed incorporation or consumption, title passed to the buyer. CKE Engineering Ltd (In Administration) [2007] BCC 975 The issue before the court in this case was whether the supplier of zinc ingots could claim the return of a percentage of the value of the zinc tank in the possession of the company at the date of its administration when the ingots had been co-mingled with other materials used in the metal galvanising process. The judge held that what the parties had agreed as to the passing of title is essentially a matter of construction of the contract. As a result of this, decisions on the effect of other clauses in respect of the supply of other goods in different contexts would only be of limited assistance. Specifically relating to the issue of co-mingling, one of the key factors was the extent to which the goods supplied had retained their identity in the buyer's hands, for it was not possible to retain title to something that could not sensibly be identified. The judge was of the view that whether or not title in the ingots supplied was capable of being retained turned upon whether or not the ingots were still capable of being identified in the zinc in the tank. An important principle to bear in mind was where chattels of two persons are inter-mixed by agreement, so that the several portions of each supplier cannot be distinguished, the proprietors have an interest in common in proportion to their respective contributions to the

Commercial Law 2016 bulk. Taking these principles into account, the judge found that, despite the inevitable presence of very small quantities of other matter, the contents of the tank were substantially zinc which could be physically reducible into ingots again and would retain a substantial part of the value of the original constituents. In the light of the above, the judge held that 217/265ths of the zinc tank belonged to the supplier of the ingots. 7

Reform of the law

The academics Sealy and Hooley note that the cumulative effect of the cases on retention of title suggests that the theoretical basis for many clauses is far from clear, and that this is an area of law that could benefit from legislation. There are competing suggestions that the issue should be resolved by regarding all retention of title clauses as chargeable interests which require registration. This idea is popular with the banks; the USA has adopted this system – the downside is that it is very costly and could hinder business transactions. Australia have also introduced a registration system under the Personal Property Securities Act 2009. Other commentators argue that there is an overriding commercial need to allow sellers to protect their interests by retention of title clauses. You can read more about the issue of reform of retention of title in Sealy and Hooley ‘Commercial Law: Text, cases and materials’ which is listed as essential reading for this workshop. Key learning points    

Limitations of real remedies led sellers to adopt retention of title clauses First case to consider the validity of such clauses was Romalpa [1976] Subsequent cases limited scope of such clauses regarding attempts to trace proceeds, separate legal and equitable title, claim manufactured goods or rely on an all monies clause. Reform proposals suggest legislation or registration system....