UK Commercial Law- Return of Title Claus PDF

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On the facts, three issues can be identified. First would be the receiver’s claim over the steel products removed by RM. Next would be RM’s claim over the monies in Stainless In Swansea Ltd (SIS) bank account. Lastly would be the dispute between RM and West Wales Factors (WWF) over the proceeds of the sub-sales. Each issue will be discussed separately but first, it is submitted that a discussion on the validity of RM’s retention of title (ROT) clause (Clause 1 in RM’s contract with SIS) is required as RM’s claim would largely depend on it being validly enforceable. As the name suggests, a ROT clause is a clause that attempts to retain the seller’s title over the sold goods until a stated event has happened (usually until the buyer completes his payment).1 Such clauses are statutorily valid as Section 17 and 19 of the Sales of Goods Act (SOGA) 19792 grants contracting parties’ statutory freedom to determine when the title of the goods was to transfer.3 This was illustrated in the case of Armour v Thyssen Edelstahlwerke AG 4 whereby the House of Lords unanimously upheld the ROT clause by reference to the statute.5 As the facts of our case are similar to that in Armour, RM would have a prima facie claim that the ROT clause was valid and enforceable. The fact that the paid and unpaid goods were mixed will be irrelevant as Clause 1 is a form of an all monies ROT clause which essentially reserves RM’s ownership in all the goods supplied until all outstanding invoices have been accounted f or.6 However, if the intentions of the parties were deemed to be vague on this issue, the courts might deem the ROT clause to be ineffective pursuant to Rule 1 of Section 18 SOGA 19797 and claim that the property in the goods passed to the buyer when the contract is made. If that was the case, RM will have no valid grounds for an action. Yet, this is highly unlikely since the clauses reflect the intentions of the parties quite clearly. Moving on with the first issue which is the dispute between the receiver and RM’s claim over the steel products removed from SIS’s premise by RM’s servants on 2nd May, the main question to be asked is whether the identity of the goods has changed as case law suggests that the effectiveness of the ROT clause would also depend on the identity of the goods.8 In brief, when the goods are deemed to have lost their identity, usually through the buyer’s manufacturing process; the seller’s

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LS Sealy and RJA Hooley, Commercial Law- Text, Cases, and Materials 4th Edition, Oxford University Press, 2009, 452. 2 Sales of Goods Act 1979, s.17, s.19. 3 William Davies, ‘Romalpa Thirty Years On- Still an Enigma?’, Hertfordshire Law Journal (2006), Volume 4, Issue 2, 3. 4 Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339. 5 ibid. 6 ——, ‘Retention of Title Clauses’ accessed 9 March 2014. 7 Sales of Goods Act 1979, s.18(r1). 8 LS Sealy and RJA Hooley, Commercial Law- Text, Cases, and Materials 4th Edition, Oxford University Press, 2009, 462-465.

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rights under the ROT clause would cease.9 This is because once the identity was lost, it would be practically impossible to trace the goods into the new product.10 Applying this to our facts, there would be a prima facie conclusion that the goods supplied by RM have lost their identity as they have been moulded into pots. However, it is submitted that the unfinished steel pots should be distinguished from the finished steel pots. This is because it can be argued that the 5 tonnes of unfinished steel pots still remained the property of RM as pursuant to the case of Hendy Lennox Lt v Grahame Puttick Ltd11, it was held that as long as there was no difficulty in identifying the goods as to which the contract related, the title of the goods would remain with the seller.12 It is also submitted that the courts should take into account the properties of the product in dispute as steel is a product that can be easily moulded and reshaped. Hence, it would be illogical to deem that its identity has changed just because it has been reshaped. Of course all of this runs on the assumption that the unfinished pots were kept separately by SIS (as per Clause 4 of the contract), showing the intention that it was still the property of RM. If this was the case, RM would not be accountable for them. However, these arguments would most likely fail for the 5 tonnes of completed pots as pursuant to the case of Re Peachdart Ltd13, it was held that the goods would not remain the property of the seller once the manufacturing process commenced and the goods lost its value as a raw material.14 Besides that, the case of Clough Mill Ltd v Martin 15 also held that the buyer will have the ownership of the newly manufactured goods as other materials have been incorporated. 16 However, the courts here went on and held that it would still be possible for the seller to retain ownership if the goods were in a separate and identifiable state.17 Hence, it would be possible to apply the case of Hendy Lennox Ltd v Grahame Puttick Ltd again and show that as long as the process was reversible, the completed pots were to remain the property of RM. 18 However, this argument remains doubtful as there were no provisions in the contract requiring the finished products made from RM’s steel to be kept separately hence leaving the intentions of the parties in this area uncertain. If the

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Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25. ibid, pg 46. 11 Hendy Lennox (Industrial Engines) Ltd v Grahams Puttick Ltd [1984] 1 WLR 485. 12 LS Sealy and RJA Hooley, Commercial Law- Text, Cases, and Materials 4th Edition, Oxford University Press, 2009, 465. 13 Re Peachdart Ltd [1984] Ch 131. 14 Ibid, pg 142. 15 Clough Mill Ltd v Martin [1984] 3 All ER 982. 16 ibid, pg 983. 17 ibid. 18 LS Sealy and RJA Hooley, Commercial Law- Text, Cases, and Materials 4th Edition, Oxford University Press, 2009, 457. 10

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courts were to find it against RM in this situation, RM will have to account for the £10,000 proceeds it obtained from selling these pots. Moving on, the next issue is whether RM could claim half of the money in SIS’s general account. Here, RM would be relying on Clause 5 which is the proceeds of sale clause. For the claim to succeed, RM has to show that no charge was created and that SIS was in a fiduciary position to invoke the equitable doctrine of tracing pursuant to the case of Re Hellett’s Estate19. This is because pursuant to the case of Re Bond Worth Ltd20, if it was found that a charge was created, the transaction would be void for nonregistration (currently governed by Section 860 of the Company Act 2006) 21 . 22 Pursuant to the case of Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd23 it was held that a fiduciary relationship is valid if the provisions in the contract show that the parties intended it to be a fiduciary relationship rather than a debtor/creditor relationship.24 Prima facie, it could be argued that there is an intention to create a fiduciary relationship. This is because it was expressly mentioned in Clause 1 that the SIS is the bailee/agent of RM until all debts are paid. Furthermore, the requirement to keep the money in a separate account will also support this argument. If this was the case, RM will be entitled to trace the money in SIS’s general account. It is submitted that the fact that the money in the account were mixed would be irrelevant as tracing would be allowed even if the funds were mixed. This is because Jessel MR in the case of Re Hellett held that “if the bailee sells the goods bailed, the bailor can in equity follow the proceeds… wherever they can be distinguished, either being actually kept separate, or being mixed up with other moneys”25. On the facts, there would be no difficulty in doing so as it was expressly stated in SIS’s records indicating that half of the money represents money due on sales of products made using RM’s steel. This would be sufficient to show an intention to distinguish it from the total amount in the general bank account. However, the case of Compaq Computer Ltd v Abercorn Group Ltd26 suggests likewise. In that case, it was held that once it was accepted that the beneficial interest in the proceeds of sale was determinable on the payment of debts, it would have the characteristics of a charge rather than a fiduciary relationship.27 This conclusion is an application of Slade J’s reasoning in Bond Worth which suggests that a charge is created if the security for the payment of a debt conferred an interest in the property 19

Re Hallett’s Estate (1880) 13 Ch D 696. Re Bond Worth Ltd [1980] Ch 228. 21 Company Act 2006, s 860. 22 LS Sealy and RJA Hooley, Commercial Law- Text, Cases, and Materials 4th Edition, Oxford University Press, 2009, 459. 23 Aluminium Industrie Vaassen BV v Romalpa Aluminiun Ltd [1976] 2 All ER 552. 24 ibid, pg 557. 25 Re Hallett’s Estate (1880) 13 Ch D 696, pg 710. 26 Compaq Computer Ltd v Abercorn Group Ltd [1991] BCC 484. 27 ibid, pg 495. 20

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that was defeasible upon payment of the debt, or appropriates such property for the discharge of the debt.28 Furthermore, the fact that the proceeds were mixed and kept in a general account also serves as evidence that there was no intention to create a fiduciary relationship. This was apparent in the case of Re Andrabell Ltd29. Applying this reasoning, the courts would easily conclude that there was no intention for the creation of a fiduciary relationship based on the actions taken by the parties, hence a charge will be deemed to exist in favour of RM with regards to the proceeds and RM’s claim would fail as the charge would be void for non-registration. The last issue revolves around the dispute between RM and WWF over the proceeds of the sub-sales. Similar to the previous ground, RM will have to prove that the ROT clause in this instance does not constitute a charge over the debts. It is submitted that if the courts decide that no charge was created and the ROT clause was valid, RM will have priority over WWF and prevail. However, since it was established above that this is highly unlikely to be the case, it is submitted that a discussion on priority of assignment is required. In other words, whose rights would prevail? RM’s equitable rights in the debts owed to SIS or WWF’s rights as assignee of the legal title to those debts by virtue of a statutory assignment under Section 136 of the Law of Property Act (LPA) 1925 30 ? It was submitted in the case of Pfeiffer Weinkellerei-Weineinkauf GmbH & Co v Arbuthnot Factors Ltd 31 that the section enables the assignee to acquire a title similar to that of a legal title.32 However, this claim would be subjected to equities which have priority over the right of the assignee. This is because priority here is determined as if the assignment had been effected in equity, not in law.33 The reasoning behind this rule is to protect the debtor from being prejudiced by the assignment. 34 On the facts, RM would have a prima facie claim pursuant to this rule as its equitable rights came prior to the rights of WWF. However, the courts in Pheiffer went further and stressed that this rule is subjected to an exception which is the rule in Dearle v Hall35. The application of the rule in Dearle v Hall is simple as it dictates that the party to hold priority would be the party that was the first to issue a notice to the sub-purchasers about the assignment.36 On the facts, even if it was not mentioned, it can be correctly assumed that RM would not have gave the sub-purchasers such notice as it would not be a natural thing for a 28

ibid. Re Andrabell Ltd [1984] 3 All ER 407. 30 Law of Property Act 1925, s 136(1). 31 Pfeiffer Weinkellerei-Weineinkauf GmbH & Co v Arbuthnot Factors Ltd [1988] 1 WLR 150. 32 ibid, pg 533. 33 ibid. 34 LS Sealy and RJA Hooley, Commercial Law- Text, Cases, and Materials 4th Edition, Oxford University Press, 2009, 992. 35 Dearle v Hall (1828) 3 Russ 1. 36 LS Sealy, ‘Retention of Title- Rule in Dearle v Hall’, The Cambridge Law Journal (1992), Volume 51, Issue 1, 20. 29

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supplier to do. WWF however would have clearly provided notice of the assignment as it would be part of the required procedure to do so. Hence, WWF would have priority over the debts by application of the rule in Dearle v Hall. Note that RM might be able to circumvent this rule if it could establish that WWF had knowledge of its rights when they undertook the assignment.37 However, without sufficient evidence to prove this, RM’s claim would most likely fail. In conclusion, it can be safe to assume that RM will have possible grounds to claim for the unfinished pots as it was explained earlier that the courts should take into account the properties of the material used. However, RM would have some difficulty in its claim for the finished pots unless it can be proven that the process is reversible. Moving on, it is highly unlikely that RM will be able to trace the proceeds in SIS’s general bank account as no fiduciary relationship could be established. Plus, a charge was created in this instance in favour of RM which was void for non-registration. Lastly, RM’s claim for priority over the debts would also fail unless RM has proof that it did provide some form of notice before WWF.

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LS Sealy and RJA Hooley, Commercial Law- Text, Cases, and Materials 4th Edition, Oxford University Press, 2009, 1008.

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Bibliography Books L.S. Sealy & R.J.A Hooley, Commercial Law- Text, Cases, and Materials, 4th edn (Oxford University Press 2009)

Journal Articles LS Sealy, ‘Retention of Title- Rule in Dearle v Hall’ (1992) The Cambridge Law Journal Volume 51 Issue 1 William Davies, ‘Romalpa Thirty Years On- Still an Enigma?’ (2006) Hertfordshire Law Journal Volume 4 Issue 2

Electronic Sources ——, ‘Retention of Title Clauses’ http://www.outlaw.com/en/topics/commercial/supply-of-goods-and-services/retention-of-titleclauses/ accessed 9 March 2014

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Table of Statutes Company Act 2006 Law of Property Act 1925 Sales of Goods Act 1979

Table of Cases Aluminium Industrie Vaassen BV v Romalpa Aluminiun Ltd [1976] 2 All ER 552 Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339 Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25 Clough Mill Ltd v Martin [1984] 3 All ER 982 Compaq Computer Ltd v Abercorn Group Ltd [1991] BCC 484 Dearle v Hall (1828) 3 Russ 1 Hendy Lennox (Industrial Engines) Ltd v Grahams Puttick Ltd [1984] 1 WLR 485 Pfeiffer Weinkellerei-Weineinkauf GmbH & Co v Arbuthnot Factors Ltd [1988] 1 WLR 150 Re Andrabell Ltd [1984] 3 All ER 407 Re Bond Worth Ltd [1980] Ch 228 Re Hallett’s Estate (1880) 13 Ch D 696 Re Peachdart Ltd [1984] Ch 131

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