Summary - Importance ROT i) ROT vs Remedies r1 PDF

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Summary - Ling’s ROT Answer-Importance of ROT to Seller (ROT vs Remedies) / Not effective Remedy to Seller / -Not effective to assert rights against manufactured goods /-Effective Weapon which protects an otherwise unsecured creditorEg - Q: 2012 ZB QWhy might be a seller be better advised to include...

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Summary - Ling’s ROT Answer -Importance of ROT to Seller (ROT vs Remedies) / - Not effective Remedy to Seller / -Not effective to assert rights against manufactured goods / -Effective Weapon which protects an otherwise unsecured creditor Eg - Q: 2012 ZB Q5 Why might be a seller be better advised to include a retention of title clause in a sale of contract rather than simply relying on the unpaid seller’s remedies for breach of duty to pay? 2009 ZA Q5 ROT not effective…in protecting the seller. Intro: The heart of commercial law lies in S2(1) SOGA 79 where it concerns the transfer of property (which is defined in S61) in exchange of paid goods, and thus buyer having exclusive ownership over the goods paid. The seller has the right to claim the price of the goods when property passes – S49(1). However, the problem may occur if the goods are sold on credit as buyer may become insolvent before the debt is fully paid by buyer to seller. As such, we will discuss the available remedies to seller and also how ROT able to function in order to protect seller.

Remedies on Unpaid Seller A seller becomes an unpaid seller when the whole price of the goods has not been paid (S38(1)(a)) or conditional payment has not been fulfilled by reason of the dishonor. Further, S39 stated the right of unpaid seller which are right of lien (S39(1)(a) explained further in Ss41-43) and stoppage at transit in the event of insolvency (S39(1)(b) explained further in Ss44-46) and a right of sale (S39(1)(c) explained further in Ss47-48). It is important to note that above remedies are only applicable when the unpaid seller is in the possession of goods. The remedies will not be effective if goods have been fallen into buyer’s possession. However, unpaid seller may insert reservation of title clause (ROT) in order to protect his interest in the event buyer become insolvent (S19).

Incorporation of ROT clause Pursuant to S19(1), ROT can be relied by seller when the goods are purchased by on credit term and the goods are in the hand of the buyer and buyer becomes insolvent (S61(4)) and the seller become unpaid seller (S38(1)). There are 2 conflicting cases shows when does the ROT is incorporated into the terms of contract. In Four Point Garage v Carter, It was held the action for recovery of the car failed as the ROT clause was subject to an implied condition that F Ltd was going to resell the car. In the contrasting case

Fairfax Gerrard v Capital Plc, the transaction involved ROT of pending payment & subject to terms of Standard receipt. The COA decided that there is no inconsistency between a ROT clause and an implied/express right to sell to a third party buyer.

Simple Romalpa Clause A simple ROT clause can be inserted as a term of contract under S17(1)and(2) where the effect is governed by S19(1) and (2). In the landmark case of AIV v Romalpa Aluminium, Mocatta J stated that simple Romalpa clause can be inserted in the circumstances of unused goods, unmixed and not lost its identity and still in buyer’s possession. The effect of ROT for a sub buyer can be found in S25. On the facts, AIV supplied aluminium to Romalpa. Romalpa went into liquidation and the appointed receivers were in the possession of unused foil and pounds in proceed of sale. AIV effectively relied on Clause 13 ROT to recover possession of unprocessed foil and applied doctrine of tracing to stake claim over all of the manufactured goods created by aluminium foil and even proceeds of sale in buyer account. In Re Bond Worth Ltd states that the effect is made so that the buyers are made bailees of the goods until it is paid in full.

In Re Peachdart, Vinelott J stated bailor-bailee relationship only applies to unmixed goods, where as in Clough Mill Ltd v Martin, Slade J stated that there is no question of bailor – bailess nor principal agency relationship existed based on the facts as the terms of the contract would be inconsistent with the law of agency. Further, Armour v Tyssen stated that a ROT clause reserve the passing of property until the payment is made in full .. .hence the buyer is in no position to give up any security over the goods in favour of the seller on the basis that the goods continue to belong to the seller.

As such, the courts will treat such terms as no more than the intention of parties and it will give effect to such an intention under S17 and S19. Also, the clause will not be treated as a charge under S395 companies act 1985 and will not require registration.

Extended Romalpa Clause However, court will take more stringent attitude towards the extended Romalpa clause when the seller trying to protect his interest in i) mixed or manufactured goods and ii) proceed of sales and book debt. In relation to the mixed goods, the seller must do more than deciding interest of the mixed goods and register the interest. In this circumstances, seller will required a more detailed and tangible effort on the part of seller to trace an interest and merely dictating an intention may not be sufficient (Indian Oil v Greenstone Shipping). This is due to once goods undergone manufacturing process, the seller deemed to have relinquish his rights over the manufactured goods that he has supplied to manufacturer (Re Peachdart as per Vinelott J).

In Re Peachdart, the company Peachdart carried on the business of manufacturing handbags. The claimant supplied leather sold under a contract of sale included a ROT clause. The clause provided not only did the title of leather remained with claimant until they were paid, but claimant can also trace title into any goods which leather was worked. Peachdart faced financial difficulties and bank appointed receivers. The dispute arose as to which creditor has better title to leather, ie bank under floating charge or claimant under ROT clause. Vinlott J stated that there was general presumption that seller claims over the manufactured goods will take the form of a charge or mortgage over the goods. The rationale for this is the added value to the new goods amount to doctrine of windfall. The seller cannot be said to be the absolute owner of the new goods but may have a proprietary claim over the new goods. The court suggested that the seller interest is in the form of charge and ought to be registered under S860 Companies Act 2006.

However, the right to trace an interest into the finished good or manufactured goods will also depend on the nature of the goods and circumstances involved. For example where goods as used in a irrevisible process – Borden (UK) v Scottish Timber. In Borden UK, Borden supplied raisin to Scottish Timbers. This was to be mixed with hardeners in order to become chipboards. Scottish Timbers became insolvent owing money to Borden who wanted to trace an interest into chipboards. Buckley J stated that any claim of ownership into the chipboard cannot exist unless it is in the form of charge ie an equitable charge and hence registered. The doctrine of tracing requires that good to be identifiable at every stage of its journey. Hence in this case, the seller losses the title in component part and cannot take title over the finished product/goods which have been used in irreversible manufacturing process. Another example is Re Bond Worth where the seller reserved an equitable and beneficial ownership meant that there was no not more than a charge of goods and required to be registered. Failure to do so will result in ROT clause being ineffective (Clough Mills v Martin).

Seller able to claim the goods which remained with buyer as long as it was identifiable even though they had been incorporated into other equipment and able to be removed without a damage through reversible process (Hendy Lennox v Graham Pattick, Staughton J). Further in Pongakawa Sawmill v Forest Products stated that where goods have not lost its identify can be tracing of interest (contrast with Chaigley Farm and Modelboard as the goods no longer identifiable).

Proceeds of Sale and book Debts In Proceeds of Sale and Book Debts, the courts attitude will be similar to mixed goods. In AIV v Romalpa, court stated that seller was able to trace proprietary rights into the proceeds of sale given that wording of the ROT it could be concluded that there was i)bailor-bailee relationship and ii)a trustor and trustee relationship between the parties which allowing doctrine of tracing to apply and there was no need to register any charge. But over the years court have sought to restrict the effects of AIV by looking at substance and not just mere form. This can be seen from Re Bondworth that court departed from decision in AIV by citing it as an erroneous decision on the matter of importing fiduciary relations into a simpler debtor – creditor

relationship. It further stated that requirement of the proceeds must be stored in separate bank account under seller’s name, the need to obtaining prior consent from seller in good dealing matters and relinquishing of residuary rights in proceed of sale or book debts.

In Re Andrabell, AA sells travel bags to Andrabell with 45 day credit with ROT clause. Andrabell went into liquidation and AA claimed all proceeds of sale to be under ROT. This is contrast to AIV on several grounds ie i) No indication of bags to be stored separately suggesting seller continued interest in respect of goods, ii) no express creation of fiduciary obligation iii) no requirement to keep monies separately imposing creditor-debtor relationship and iv) it was held that 45 days credit suggest that buyers could deal with monies without the need to account the sellers for it.

There are circumstances that buyer would never relinquish rights over proceeds/book debts. For exampes in Tatung v Galex Telesure, the contract include the terms which are the property remained with Tatung until all debt were settled and proceed of resale/hire should be kept In a separate account it was held a charge had been created over the proceed of sale and was void for the want of registration under Companies Act 2006. The similar senario and outcome also happened in the cases of Pfieffer v Arbuthnot and Compaq Computer v Abercon.

Conclusion It is suggested that a ROT clause would offer a better protection than remedies that of S38 and S39. However, for the extended ROT in manufacturing/mixed goods and proceed of sale/ book debt, the seller need to be reminded the registration under companies Act 2006 requirement. Failing to register will cause the unsuccessful claims....