retention of title clause

In English business and commercial contracts, suppliers of goods often supply goods on credit to the buyer. The Sale of Goods Act provides that ownership of the goods passes when the parties intend for it to do so, which is decided having regard for the circumstances of the case, which often when the contract is made. Retention of title clauses displace this operation of law by agreeing in the contract of supply that title to the goods will not pass when the contract is made, but when the goods have been paid for.

In the absence of such a reservation of title clause, in the event of a failure to pay for the goods, the supplier must sue for payment. If the purchaser is insolvent, the supplier of the goods is left without an effective remedy of damages (which would be equal to the market value of the goods plus interest). The use of reservation of title clauses allows the supplier to retain title to the goods until payment is received by incorporation of a suitably worded provision in the contract.  This will condition will normally be the payment of the price for the goods.

Retention of title clauses often see their value when a buyer becomes insolvent and enters administration or liquidation. A liquidator of a company takes control of all of the assets of the company when appointed. If the assets are not owned by the company, the liquidator does not have control of them and thus remain the property of the seller, and thus not available to be realised for the general pool of creditors. The benefit of retention of title clauses are not limited to insolvency situations, as consistently defaulting buyers are able to be called upon to return the goods to the supplier in accordance with the terms of the clause.

In order to be effective:

1. the clause will need to be contained in
   1. a contract signed by the buyer; 
   2. an unsigned document containing contractual terms of which the buyer was aware; or
   3. in a document which the seller had done all that was reasonably necessary to draw the buyer’s attention prior to entering the contract;
2. the goods supplied must be marked as those of the seller. Usually contracts require the buyer to store goods separately to other goods, and not interfere with markings identifying the goods applied by the supplier;
3. loss of identity of the goods results in loss of title to the goods.

Types of Retention of Title clause

In English contract law, retention of title clauses are able to be prepared with different and more extensive remedies in mind. Some however are not as easily enforceable as others.

1. Simple clause: Reservation of ownership of the goods until they have been paid for. Enforcement of a simple clause will require the seller to show:
   1. that he supplied the goods to which he lays claim to the buyer;
   2. that the actual goods are in the possession and under the control of the buyer;
   3. that the buyer has not paid for those same goods.
   Difficulty may therefore arise when the buyer has not separated the goods which are subject to the reservation clause from other goods which are not.  Unless the buyer is under an obligation to store the goods separately, or the goods are capable of being specifically related to unpaid invoices, the seller’s claim is liable to fail.
   If the effect of the clause however is that the buyer has the power, express or implied, to deal with the goods so as to change their identity, and exercises that power, the reservation of title is likely to be defeated by such a change of identity.
    
2. All moneys/current account clause: ownership in the goods supplied is not conveyed until all monies owed by the buyer are paid to the supplier.
   Clauses such as this developed due to the inadequacy of simple clauses to address the problem of goods becoming mixed and ceasing to be readily identifiable upon the onset of insolvency, as the precise ones which had not been paid for under a given invoice cannot be ascertained.
   The House of Lords has ruled unequivocally that an all moneys clause is in principle valid in Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339.  With such a clause, all that has happened is that the condition upon which title passes has been defined as the payment by the buyer of all moneys due.  This is permissible under Sale of Goods Act. Lord Keith of Kinkel said, “Such a provision does in a sense give the seller security for the unpaid debts of the buyer.  But it does so by way of a legitimate retention of title, not by virtue of any right over his own property conferred by the buyer.” 
   Accordingly, the legal or equitable did not pass to the buyer; only a right of possession. Thus the mere fact that the seller’s motive and intention may be to achieve a form of security in respect of the goods by using an all moneys clause does not mean that he has created a charge.   However fashionable the purposive approach to the interpretation of contracts may be, the key question will be whether legal and equitable title have in fact been separated.  
    
3. New goods clause: when the goods supplied change form (by being combined with other products or mixed with other products), the supplier asserts title over what the goods become part of other goods.
   These clauses developed due to the supplied goods being used in a manufacturing process and becoming mixed with other goods. The clause effectively says that the supplier retains title over goods manufactured until all sums owing are paid. Clauses of this type are likely to amount to an charge; the effect of the clause is to vest property in new goods in a person other than the manufacturer, so it is difficult to see how the right could be anything other than a grant of security (an equitable charge) over property for money due.   It may purport to be a retention of title clause, but it clearly does a lot more than merely retain title or set a condition under section 19 of the Sale of Goods Act for when title will pass.
    
4. Tracing proceeds of subsale clause: claim over the proceeds of sale received by the buyer when the goods are on sold to a third party. Another of the problems with a simple clause is that the mere retention of title does not create any equitable right to trace into the proceeds of sale.  There is no equity to trace into a mixed fund in the absence of a fiduciary relationship.

Depending on the terms of the clause, assuming it is enforceable, the remedies available to a supplier include:

1. possession of the goods;
2. market value of the goods, plus interest;
3. where possession of goods subject to an effective reservation of title clause are interfered with, they are liable for wrongful interference and damages for the interference;
4. all sums which remain unpaid by the buyer.

Retention of title clauses create an in rem security interest in the goods supplied.  The law applying to retention of title is well developed and complex, and tailored provisions should be created, rather than rely on clauses intended for universal application.  For instance, reservation of a mere equitable title will not be enforceable against a liquidator unless it is registered; and more elaborate clauses purporting to trace proceeds of sale are required to be a equitable charge and registrable with the Registrar of Companies in accordance with ss 860 and 875 of the Companies Act. An unregistered charge is, so far as it confers any security over a company's property, void as against an administrator or liquidator of the company and as against any creditor of the company.

Romalpa Clauses - The Case

Retention of title clauses are also known as Romalpa clauses. The name is derived from the English contract and insolvency case in which the type of clause was first considered, Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676. Romalpa processed tin foil which was purchased from Aluminium Industrie. The contract stated that the goods were supplied by Aluminium Industrie on the basis that title to the foil passed when the purchase price was paid and until that time, Romalpa held the foil supplied as the bailee and subject to the fiduciary owners, Aluminium Industrie.

After Romalpa entered liquidation, the bankers for Romalpa sought to rely on its floating charge over the assets of Romalpa, so as to show better title to the foil than that of Aluminium Industrie. The Court of Appeal held that Aluminium Industrie retained title to unprocessed aluminium foil. The subsale proceeds were also accepted by the court as the natural proprietary successor to the original foil which had been subsold. As such, the proceeds were the subject of a corresponding equitable ownership on the sellers' part. The buyers had sold the foil as agents and fiduciaries for the sellers, and thus held the proceeds for the sellers, who were the equitable owners. The seller could trace into those proceeds of sale.  This defeated the claims of the receiver appointed by the buyer’s bank. 

Roskill LJ said in the well-known passage in his judgment in the case:

"I see no difficulty in the contractual concept that, as between the defendants and sub-purchasers, the defendants sold as principals, but that, as between themselves and the plaintiffs, those goods which they were selling as principals within their implied authority from the plaintiffs were the plaintiffs' goods which they were selling as agents for the plaintiffs to whom they remained fully accountable."