Retention of Title

The purpose of this note is to give a brief overview of the law relating to retention of title in England and Wales. This note will examine:

• The background issues relevant to the operation of retention of title clauses;
• Basic provisions for inclusion in a retention of title clause;
• Issues relating to "all monies" clauses;
• The effectiveness of retention of title clauses in relation to proceeds of sale;
• The effectiveness of retention of title clauses where goods are mixed; and
• Other relevant consideration.

Attached to the end of this note there is a draft clause. The clause is provided by way of example of standard retention of title provisions. It is necessary to review the relevance and effectiveness of those provisions in relation to each particular circumstance including the type of goods which are being sold, the relationship between the Buyer and Seller and the other contractual provisions relating to the sale which may impact upon the clause. In particular it may be appropriate to amend other provisions of the contract of sale in order to effectively incorporate a standard retention of title clause.

Background

Retention of title clauses have been effectively used in a number of civil law jurisdictions for many years. Indeed, the first major authority in England and Wales relating to retention of title clauses involved the Court construing a literal translation of a Dutch contract that included a retention of title clause. The case was Aluminium Industry Vassen BV v Romalpa Aluminium Limited [1976] 1 WLR 676 CA. Retention of title clauses are commonly referred to as 'Romalpa' clauses.

In considering a retention of title clause it is necessary to bear in mind the Sale of Goods Act 1979 ("SGA"), the Companies Act 1985 and certain aspects of Insolvency law. Each of which will have a bearing on the effectiveness of the clause.

Section 17 of the SGA provides that parties are free to legislate when title will pass to goods and under Section 19 the Seller may reserve the right of disposal of goods even until after delivery. If the Buyer and Seller do not specify when title is to pass and there is no express reservation on the right of disposal of the Buyer, then the Court will look to the contract and all the relevant circumstances in order to determine the intention of the parties as regards the passing of title. In general terms, it will be presumed that it was the intention of the parties in relation to specific and ascertained goods that title will pass to the Buyer upon contract or at the latest upon delivery to the Buyer (Section 18 Rules 1 and 5 of the SGA). Where delivery is to be effected through a carrier then delivery to the carrier will be deemed to be delivery to the Purchaser (Section 32). Under Section 20 of the SGA risk in goods will also pass with the title unless the Buyer and Seller otherwise decide.

Under Section 25 of the SGA a Buyer in possession of goods will be able to transfer good title to his end customers where his customers are bona fide purchasers for value acting without notice of the Seller's title in the goods.

It can be seen from the above therefore that the SGA allows sufficient latitude for Buyers and Sellers to determine when and under what conditions title to goods will pass and whether this will be together with or separate from the risk in the goods.

It is also relevant to consider in relation to the effectiveness of retention of title clauses whether or not they will constitute a charge over goods or over the proceeds of sale of goods. If the retention of title clause is construed as a charge then under the Companies Act 1985 (Section 395) any such charge will be void as against an administrator or liquidator or any person acquiring an interest in the goods, unless it is registered. Similar provisions apply in respect of individuals under the Bills of Sale Act 1872 and 1878.

Basic Retention of Title Clauses

The object of a retention of title clause is to ensure that until the Seller is paid the creditors (both secured and unsecured) of the Buyer do not obtain any right in relation to the goods which the Seller has supplied.

There are a number of elements which a basic retention of title clause should contain these are:

• The clause should retain for the Seller both the legal and beneficial title to the goods concerned. If the clause separates legal and beneficial title and leaves the Seller only with beneficial title then the clause will be ineffective (see re Bond Worth [1980] ch.228).
• The Seller should be given the right to repossess the goods and for such purpose to enter onto the premises at which the goods are kept at any time or upon a specific event such as insolvency or simply on demand.
• The Seller should be careful to separate the passing of title from the passing of risk. It would be appropriate from the Seller's point of view to ensure that risk in the goods passes to the Buyer at the point of delivery. If he does not, then risk in the goods will remain with the Seller until title passes.
• With the passing of risk to the Buyer the clause should provide that the Buyer is under an obligation to insure the goods against loss or damage. The Seller should be appointed as lost payee under the insurance policy or at least have its interest noted on the policy.
• The Seller should require the goods to be kept separate from other goods in order to avoid the mixing of these goods with other goods either of the Seller or other suppliers to the Buyer. If it does not, then the Seller may lose its title to the mixed goods (see comments later).
• In addition to separate storage an additional protection for the Seller is to require the goods to be marked as the property of the Seller. It is helpful both from an identification point of view and from the point of view of putting any insolvency practitioner upon notice of the claims of the Seller.
• The clause should also include an express restriction upon the Buyer affixing the goods to any land or buildings and depending upon the nature of the goods and the relationship between the Seller and the Buyer it may also be appropriate to restrict the Buyer from mixing the goods with other goods until the Seller has been paid. (See comments later).
• Whilst not usually incorporated within the retention of title clause it is important to ensure that the contract incorporates a right for the Seller to sue for the price of the goods on a 'day certain'. Under the Sales of Goods Act 1979 (Section 49(1)) the Seller is only entitled to sue for payment either on a day certain or when title to the goods has passed to the Buyer.

'All Monies'

The object of an all monies retention of title clause is to ensure that title to goods will not pass to the Buyer until the Buyer has paid all outstanding monies owed to the Seller. The 'All Monies' clause can be restricted to monies owed for all consignments under a particular contract of sale or can apply to all sales by the Seller to the Buyer or indeed to all other indebtedness of the Buyer to the Seller. There is no limitation as to which monies the payment of which is a condition for the passing of title.

Although an 'All Monies' clause is probably effective, if properly drafted, it gives rise to two basic issues which need to be considered:

• Title in the goods may never pass to the Buyer whilst there is any continuing trade or indebtedness between the Seller and the Buyer. It may be, however, that if the Buyer on﷓sells the goods under an express right or pursuant to Section 25 of the Sale of Goods of Act, the end purchaser will obtain title to the goods.
• If all payments are at any point up-to-date then title to all goods will as at that date, vest in the Buyer. Any new supply of goods thereafter may be subject to retention of title but may be mixed with goods for which title has vested in the Buyer. This may give rise to issues regarding identification and mixing (see below).

'Proceeds of Sale'

The object of a Proceeds of Sale clause is to allow the Seller to follow and trace the proceeds of sale of any goods to which it retained title and effectively claim ownership of the relevant funds.

In the Romalpa case it was held that by reason of the fiduciary relationship between the Buyer and Seller the Buyer held the proceeds of sale under a trust for the Seller. This was evidenced firstly by the fact that the monies were paid into a separate bank account and secondly by the fact that the Buyer did in fact acknowledge its fiduciary duties to the Seller.

It is generally not regarded as possible in a retention of title clause to a create artificial fiduciary relationship. If a fiduciary relationship does in fact exist, for instance, where the Buyer sells goods as agent for the Seller or where the Buyer is simply a bailee for the Seller then it may be possible for the Seller to retain title to the proceeds of sale. In such case the retention of title clause can be used to bolster the duties of the fiduciary agent by requiring the payment of any proceeds of sale into a separate bank account and the accounting to the Seller of the relevant monies.

A simple contractual right to the proceeds of sale will not be effective unless it is registered as a charge over the book debts.

It should be remembered that whilst the creation of a fiduciary relationship between the Buyer and Seller may have advantages regarding retention of title to goods it may have certain disadvantages such as the creation of liability between the Seller and the Buyer's end purchasers. It may also create a liability for the Seller under the Commercial Agents (Council Directive) Regulations 1993, in particular to compensate/indemnify the agent for loss of the agency.

Mixing of goods

Retention of title clauses sometimes contain provisions which try to retain title to goods which are mixed with other goods or to assert title to products which are created by the mixing of the Seller's goods with the goods of other suppliers.

Given the authorities which exist it is doubtful whether any such clause would be effective without proper registration as a charge. As a general rule original goods will cease to exist when used in a manufacturing process, therefore the Seller cannot retain title to goods which are combined with others to form a new product as the goods no longer then exist. There is an exception to this general rule in relation to sub-assemblies or large components which can be detached and restored to their original state. However even in relation to this exception it is desirable (for the effectiveness of the clause) that the sub﷓assemblies or component have not been re-worked or processed in any way by the Buyer before incorporation into the larger product.

Goods, which are affixed to land or buildings, may, at the point of affixation, form part of the land or the buildings concerned and the retention of title may be lost.

It is essential for the effectiveness of any retention of title clause in relation to any particular goods to ensure that those goods are identifiable in the hands of the Buyer. It is unlikely to be a problem where the goods are unique or where they are identifiable by serial numbers which can be linked to unpaid invoices. Where, however, the goods concerned are commodities such as raw materials, it may be difficult for the Seller to identify out of a mountain of bricks, for instance, which bricks belong to the Seller and which belong to the Buyer or to other suppliers. The Seller does not have the right to demand an equivalent number of goods where it cannot identify goods which it owns in the hands of the Buyer. Again, it is unlikely to be a problem where all goods have been supplied by the Seller where there is 'all monies' clause or the goods can be appropriated to the relevant invoices. It is important therefore to provide in the contract for an obligation on the Buyer to keep separate and to identify all goods supplied by the Seller. Provided such a clause is included, where there has been mixing of the goods contrary to such clause by the Buyer the Seller may be able to take goods from the mixed "pile" as tenants-in-common.

Other considerations

A retention of title clause will not be valid unless it is incorporated into the contract concerned. It is therefore very important that the Seller effectively incorporates the retention of title clause into its contract and that its contract forms the basis of the supply of goods. Although a retention of title clause should be accepted by the Buyer there is no requirement for special notice of it to be given to the Buyer.

A retention of title clause should be consistent with the other provisions of the contract. If it is intended that there be a fiduciary relationship between the Seller and Buyer (e.g. an agency) there shouldn't be any standard provisions which would negate this provision. Also the way in which the contract is carried out in practise will be looked at by the Court to a) interpret the clause and b) to give effect of the intentions of the parties.

It is important for any insolvency practitioner appointed in relation to a Buyer to be put upon notice of the Seller's rights as soon as possible. If the Seller delays then it is likely that the insolvency practitioner will deal with stock very quickly and may sell it. If the insolvency practitioner has notice of the claims of the Seller then he will have personal liability for conversion (i.e. tortuous interference with the goods concerned) if he were to sell the goods.

Under an administration order a Seller cannot enforce its retention of title clause against the administrator without a Court Order or the consent of the administrator. The administrator may in fact sell the goods and account to the Seller for the proceeds of sale.

Conclusion

Retention of title clauses form an important element of a Seller's credit protection strategy. They are, however only one element and unfortunately they are often drafted unnecessarily wide and in consequence may be unenforceable.

It may be that a retention of title clause is inappropriate in certain circumstances, for instance where the goods concerned are of a perishable nature or have a low re-sale value. In such circumstances it would be more appropriate simply to require payment before delivery or to shorten the credit period in order to decrease the risk. Credit control systems should be in place in order to ensure that there isn't a build-up of goods in the hands of the Buyer without payment and it may be appropriate to require the Buyer to obtain credit insurance or to give some security by way of a registered charge over its assets or to give a parent or bank guarantee for the benefit of the Seller.

Specimen Retention of Title Clause

Note: to be amended as appropriate to fit the underlying commercial relationships, the nature of the goods and the other provisions of the contract of sale. This Clause does not include 'proceeds of sale' or 'mixed goods' clauses.

Notwithstanding delivery of the Goods to the Seller and the provisions of Clause 2 legal and beneficial title to the Goods shall remain with the Seller until the Seller has received payment in full and in cleared funds of:

• the Price;
• the purchase price of all other goods and/or services (if any) supplied by or on behalf of the Seller to the Buyer [for which payment is then due]; and
• any other monies owed [and due] by the Buyer to the Seller on any account whatsoever.

All risk of damage, loss or destruction of Goods shall pass to the Buyer at the time of delivery of the Goods to the Buyer or if earlier, at the time the Seller tenders delivery of the Goods to the Buyer.

Unless and until title in the Goods passes to the Buyer:

• the Seller may at any time in its absolute discretion inspect, move, retake possession of, sell, dispose of or otherwise deal with the Goods;
• the Seller, its agents and other authorised representatives may at any time and without notice enter any premises at which the Goods are situated or kept or at which the Seller believes the Goods are situated or kept for the purpose of exercising its rights under Clause 3(a);
• the Buyer shall procure and provide to the Seller on demand all such access, facilities, resources and assistance as the Seller may require in order to exercise its rights pursuant to Clauses 2(a) and 2(b) and, at the request of the Seller, the Buyer shall at its own cost deliver the Goods to the Seller or its nominee at such place or places as the Seller shall specify;
• the Buyer shall insure the Goods for their full replacement value with a reputable insurer [approved in writing by the Seller] and shall name the Seller as loss payee [OR shall ensure that the interest of the Seller is noted on the policy of insurance] and shall immediately upon demand by the Seller provide the Seller with a copy of the relevant certificate of insurance;
• the Buyer shall not pledge, charge, encumber or create any security or any indebtedness over or in respect of the Goods;
• [the Buyer may sell the Goods only in the ordinary course of its business but shall not otherwise sell, dispose of or otherwise deal with the Goods in any manner whatsoever and the Seller may at any time by notice to the Buyer revoke any right of the Buyer to sell the Goods];
• the Buyer shall store the Goods separately from all other goods whether supplied by the Seller or any other supplier of goods to the Buyer. The Buyer shall not remove or make unreadable any mark placed on the Goods or the packaging of Goods by the Supplier and shall ensure that the Goods are all times marked as the property of the Seller or stored in such a way as to make it obvious that the Goods are the property of the Seller;
• the Buyer shall not affix, attach or incorporate the Goods to or into any land, buildings, structure or premises or into any goods or products or use the goods to manufacture or produce any other goods or products.

For further information please contact John Armstrong at [email protected] or on +44(0)20 7367 2701 or contact Ben Horton at [email protected] or on +44(0)20 7367 3747.