In uncertain economic times sellers often find themselves concerned about receiving payment for goods sold. 1 Most businesses are concerned about their buyers defaulting on payment due to lack of cash flow or insolvency. The term ‘retention of title’ has become significantly vital in a commercial perspective due to the important ruling made in a case of Romalpa . By including such a clause into the contract, Stephen would acquire priority over secured and unsecured creditors of the buyer in case of buyer defaulting in payment for the goods supplied.
Retention of title clause displaces the usual rule of law that ownership passes to the buyer at the time of delivery and states that title of goods does not pass from the seller to a buyer until the buyer has settled down all the invoices with the seller. 2Therefore this would provide Stephen with a form of security against the buyer. Section 19 of the Sale of Goods Act 1979 also recognises that the property in the goods will not pass until the price is paid. A well drafted retention of title clause can provide a seller with valuable rights.
However, regardless of it, in order for Stephen to be able to rely on the clause it has to be properly incorporated into the contract. This can be done by notifying the buyer of the clause either by including it in a contractual document signed by the insolvent or by showing that both parties understood the seller’s terms of business. One way to find out is to look at the statements made in the scenario ‘The gravel he supplies is generally mixed… ‘ and ‘owns a business supplying gravel to other businesses. It appears to be clear from the word ‘supply’ that there is a contract and therefore, the incorporation could be presumed. The first all monies clause would allow Stephen to reserve ownership of all the goods supplied, even if the goods are in the buyer’s possession, the title will remain with the seller until all the monies have been paid to him.
In contrary to the basic clause, the all monies clause eliminates the need for the seller to identify which goods have been paid for and which are still awaiting payment. In the case of Armour v Thyssen Edelstahlwerke The House of Lords, on appeal from a Scottish decision has held that such clause does not create a charge, however in the recent case of Bulbinder Singh Sandhu v Jet Star , the ROT clause was inconsistent with the parties’ clear intention that the stock will be sold on to customers. It is advisable that this clause is incorporated into a contract as a separate sub clause so that if an all monies clause was held invalid for lack of registration as a charge, it would not invalidate the rest of the clause.
Furthermore, Stephen wishes to rely on a mixed goods clause that may allow him to reserve rights of ownership in any new product that results from manufacturing process. 4 In theory, this clause may benefit the business however, goods will only belong to Stephen if they can maintain their identity and can be easily separated from other goods, without causing damage as illustrated in the case of Hendy Lennox v Graham Puttick . As Stephen’s business involves selling gravel, it is unlikely that this clause will succeed.
It will all depend on how Stephen uses his product. Once it is incorporated into other products such as concrete he may lose his proprietary right as S. 25 of SGA1979 gives right to the buyer to sell to third party and therefore Stephen would be at a loss. It is likely that Stephen’s goods will lose their identity once it has entered the manufacturing process as it would be difficult to separate his gravel from other products. Thus the new product will belong to the buyer.
The Glencore case makes a 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 goods. However, if mixed incorporation or consumption occurred then title passed to the buyer. 5 In the case of Borden v STP the identity of resin was lost when it entered the manufacturing process to produce chipboard and so Buckley LJ found that the parties intended ownership to pass to the buyer when the goods were manufactured.
As provided by S. 17 of SGA 1979 ownership passes when intended to pass. 6 Similarly, in the case of Peachdart Ltd, Vinelott J. held that property passed to the buyer when the leather was incorporated into the handbag-making process. Moreover, the case of Model Board Ltd v Outer Box Ltd added that if a clause purports to retain title over manufactured goods, the clause would create a registrable charge, which will therefore be ineffective. As a result, in this situation, the clause will most likely be regarded as invalid by the courts.
In fact, sometimes it may bring inconvenience to the seller if its invalidity renders the basic and all-monies clauses invalid for non-registration. Consequently, Stephen will have to look for other ways of securing the purchase price such as credit insurance. Although there is proof of case law that such clauses succeed, the practical outcome of a series of cases has put it beyond doubt that “extended” title reservation clauses will not work. “7 The last clause that was proposed appears to be proceeds of sale clause where goods supplied are resold by the buyer.
This clause would enable Stephen to assert rights in the proceeds of sale in order to satisfy the purchase price. In the case of Romalpa the seller was able to recover proceeds of sales. However, this was only on the grounds that the courts were able to find a fiduciary relationship between the parties meaning that the buyer was under a duty to account for the sale proceeds to the seller as beneficiary. 8In the recent cases the courts have failed to find a fiduciary relationship between the parties and so were regarded as debtor and creditor relationships, which require registration.
Thus, currently it is very difficult to draft proceeds of sale clause as such clauses will be regarded as creating a charge, which if not registered under the Companies Act 2006 will be void and therefore unenforceable. Cases such as Clough Mill Ltd v Martin and Re Bond Worth Ltd show that the Courts will focus on the particular wording of the retention of title clause when deciding whether it amounts to a charge. Furthermore, Goff LJ expressed that the nature of the relationship was unimportant.
In performing this task, concepts such as bailment and fiduciary duty must not be allowed to be our masters, but must rather be regarded as the tools of our trade. “10 There appears to be no logical basis for this restriction and it has been argued that the House of Lords should “put this fallacy firmly to rest. “11 It would be inadvisable to include proceeds of sale clause without taking specialist legal advice. Such clauses must be worded in a way that would retain sale proceeds in a separate account for the seller’s benefit. Otherwise it would be difficult to identify which payments relate to which contracts or goods.
Stephen should be very careful over the customers he extends credit terms to. He should consider assessing credit worthiness of his customers on a regular basis, to ensure that there is no risk of loss. 12 By reviewing the clause regularly, it would allow Stephen to reflect upon any changes in the law. Professor A. L Diamond (1989) argues that the need for a reform in this area of law is urgent.
The scheme of registration for security interests does not seem hopeful, unlike in United States who follows Article 9 of the Uniform Commercial Code. 3Such system would allow Stephen to include ROT clauses without the need for registration, which would be advantageous to him and other traders. Perhaps it would be fair to say that in recent years the position of unsecured creditors has slightly improved due to the changes that occurred in UK insolvency law. All monies clauses have received higher judicial approval and it seems to be clear that proceeds and manufactured goods clauses will usually fail, whereas a simple clause will most likely be effective.