6. Retention of Title

6.1 The Commercial Context

- Sale of Goods on credit

- Retention of title until goods paid for

- Development of simpliciter/complexiter

- Purpose to secure payment for the price

- ss.395-6 Companies Act 1985

- No provision in ss.395-6 to actually register a retention of title clause

- A company can only grant a 'charge ' over its own assets.

Armour v Thyssen Edelstahlwerke (1990) 3 All ER 481

6.2 Romalpa Clauses

See: Parris, Effective Retention of title clauses (1986)

Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676

The clause (paraphrased):

(a) The ownership in the goods was to pass on full payment.

(b) The goods were to be stored (until payment) in such a way that they were clearly the property of the plaintiffs.

(c) If the purchaser should make new goods from the foil the plaintiffs were to become the owners of the new goods as surety for the price.

(d) Until full payment of the price had been made the plaintiffs were to store the newly created goods in the capacity of "fiduciary owners" in such a way that they could be recognised as such.

(e) The buyers were to be entitled to sell the new goods to third parties in the ordinary course of business provided they 'hand over' their rights against the sub-buyers until the foil had been paid for.

£122,000 was owed to the plaintiffs. The plaintiffs claimed:

(a) £35,152 being the proceeds of sale on sold aluminium foil in the possession of the receiver - a right to trace.

(b) Delivery up of the unsold foil in the possession of the receiver - a right claimed under the retention clause.

(c ) These rights took priority over the rights of secured and unsecured creditors of the defendant company.

The defendants conceded that they held the unsold foil as bailees but that once the foil was sold their relationship with the seller was simply that of debtor-creditor and that the plaintiffs were not entitled to trace into the proceeds of sale. The Court of Appeal found a fiduciary relationship on a bailor/bailee basis and allowed tracing into the proceeds of sale in priority to the other creditors.

6.3 SS.17 and 19 Sale of Goods Act 1979

S.17 Sale of Goods Act 1979 provides:

"(1) Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.

(2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties, and the circumstances of the case."

S.19 Sale of Goods Act 1979 provides:

"Where there is a contract for the sale of specific goods or where the goods are subsequently appropriated to the contract, the seller, may, by the terms of the contract or appropriation, reserve the right of disposal of the goods until certain conditions are fulfilled; and in such a case, notwithstanding the delivery of the goods to the buyer, or to a carrier or other bailee... for the purpose of transmission to the buyer, the property in the goods does not pass until the conditions imposed by the seller are fulfilled."

6.4 Unaltered goods in the possession of the buyer

Attack on Romalpa clauses

- clause is a charge and has to be registered: s.396 (1) CA 1985 and is void for non registration under s.395 CA 1985

- clause as drafted does not give seller extended powers claimed.

Clough Mill v Martin [1985] 1 WLR 111

High Court; Judge O'Donoghue

Purpose of clause to secure payment for price - rights given for that purpose - contract to take effect as one where property passed on delivery - rights sellers now enjoyed effective only as a charge - void for non-registration under s.95 CA 1948 (now s.395 CA 1985)

Court of Appeal: Goff, Oliver LJJ, Sir John Donaldson MR

Seller had effectively retained title under s.19 SOGA 1979 until paid for the goods or the buyers resold.

- Retention clause properly drafted effective.

- Position on resale of goods left open.

Opinion:

If contract repudiated by buyers failure to pay which would be the position if payment a condition of the contract the seller would be free to resell the goods free from rights of the buyer.

Aliter: the seller would be entitled only to resell such goods as necessary to obtain price owing.

Practice points:

- Draft clause with linked clause that payment a condition Lombard North Central plc v Butterworth [1987] 1 All ER 267 CA

- Retain 'Legal ' ownership in the goods

In Re Bond Worth Ltd [1980] Ch 228 Slade J held that the retention of 'equitable and beneficial ownership' amounted to a grant back of rights and was a charge void for want of registration. The decision on this point is possibly objectionable on ground that the Sale of Goods Act 1979 makes no distinction between legal and equitable title.

If the buyer company never acquires title there is nothing to grant back and no charge arises.

- Rights granted to the buyer to consume or sell the goods do not negate the retention rights until the goods are consumed or sold. (Consider the speculative arguments advanced in Section B.)

- Repossession provisions (including entry on premises and seizure) are valid provided the clause is so drafted. Such rights are not granted by the buyer company and no charge arises. Shiloh Spinners v Harding [1973] AC 691 .

- "All accounts" clauses if carefully drafted should not be struck down. S.19 allows the seller to stipulate such condition(s) to be fulfilled by buyers as he wishes before property passes to the buyer. . .

See Armour v Thyssen Edelstahlwerke (1990) 3 All ER 481

- The clause should make specific provision that the goods be stored separate from other goods (possibly owned by the buyer) until consumed or resold.

- Provision that the buyer receives goods as bailee or agent seem relevant only to the question of accountability and tracing into the proceeds of sale (infra).

- Incorporation and clear drafting are essential. The seller should mark his goods clearly.

- Important to provide that risk passes to buyer on delivery.

- Since property has not passed no action for the price under s.49 may be maintained. Draft a day certain clause to allow an action under s.49 (2) or, better - make express provision in the contract that the seller may maintain an action for the price irrespective of delivery or that property has not passed.

In a falling market it would be possible to waive the retention right, allow the property to pass and sue for the price under s.49 Sale of Goods Act 1979. (Waiver of unilateral rights at common law.) A useful point if the buyer is able to meet his obligations.

- Check the VAT relief on bad debts under current legislation. VAT leaflet 700/18/86 - relief limited to supply of goods where property had passed.

- If a buyer does resell (even without permission) the bona fide purchaser will acquire title under the nemo dat exception - s.25 Sale of Goods Act 1979. Four Point Garage Ltd v Carter [1985] 3 All ER 12 ; National Employers Mutual General Insurance Association v Jones [1988] 2 WLR 952 HL

Aliter: if the sub buyer knew of the Romalpa clause

Re Interview Ltd [1975] IR 382

- Provisions that vest rights of the buyer against sub buyers in the seller on resale are dangerous. They may well be construed as registrable charges. Similarly, declarations of trust. (Infra)

6.5 Altered goods and new products

Borden (UK) Ltd v Scottish Timber Products Ltd [1979] 3 All ER 961 CA.

Sellers sold resin to the buyers on terms that the property would pass on payment for the goods. The reservation of title clause provided that any chipboard manufactured by the buyers using resin sold by the sellers to the buyers would be charged for the amount owing to the sellers and should the manufactured goods be sold, the sellers claimed to be entitled to trace into the proceeds of sale.

The Court of Appeal held:

(i) The sellers rights over the resin ceased to exist once the resin became incorporated in the newly manufactured chipboard for one cannot reserve title over goods which have ceased to exist..

Similarly, any purported right to trace based on reservation came to an end once the goods had ceased to exist for there was nothing to trace into. Romalpa was distinguished on the ground that there was no fiduciary relationship between seller and buyer. The buyers did not receive qua bailees.

Bridge LJ observed (2) - "But so long as the business transacted between these parties continued in the ordinary way and resin was delivered for use in the manufacturing process at a time before it could have been paid for, in circumstances in which the sellers clearly had no right to call for its return or to object to its use in the manufacture of chipboard, and where it was never intended that the resin should be recovered, either in its original or in its altered form at all, it seems to me quite impossible to say this was a contract of bailment."

(ii) A further point taken by the other members of the Court of Appeal was; even if an interest had arisen in the chipboard (which was not the case) such an interest would amount to a charge and would be registrable under s.5 Companies Act 1948.

Templeman LJ, considering the difficulty of calculating the percentage interest the seller had in the new product, in terms of the ratio of the value of the resin to the new product, said - "At some distant date, when the court has unearthed the unearthable, traced the untraceable and calculated the incalculable, there will emerge the sum which it is said belongs to the sellers in equity, a sum which is immune from the claims of the Crown and mortgagee, debenture holder and creditor, a sum secured to the sellers by a simple retention of title clause, which referred only to resin but was pregnant with all the consequences alleged in the statement of claim and hidden from the gaze of all other persons who dealt with the buyers."

Re Peachdart Ltd [1984] Ch 131

Leather supplied subject to a Retention clause - leather worked by buyer to make handbags - Vinelott J held that parties must have intended that the leather would cease to be the exclusive property of the seller once the buyer started to make the bags - the seller now had a charge which was void for want of registration. Vinelott J admitted that his construction did 'considerable violence' to the stated intention of the parties.

Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd [1984] 1 WLR 485

The process of incorporating diesel engines sold subject to a reservation of title clause did not negate the clause - the incorporation could be reversed without damage to the goods sold or the new product created.

Clough Mill v Martin [1985] 1 WLR 111

Robert Goff LJ; "where A's material is lawfully used by B to create new goods, whether or not B incorporates other material of his own, the property in the new goods will generally vest in B, at least where the goods are not reducible to the original materials."

Practice point

- Unless an express contrary intention appears the seller's property in the goods will vest in the buyer if the identity of the goods is lost or if working changes the product into new goods save the circumstances outlined in Hendy Lennox where it is possible to detach the original goods sold without damage to the goods sold or the item in which they were incorporated.

Provisions giving the seller ownership in the newly manufactured goods

Borden; Peachdart; Bond Worth seem to assume that that manufacturing processes destroy the sellers ownership rights and that a charge is created in favour of the seller which, if not registered, is void.

In Clough Mill while the Court of Appeal rejected a sellers ownership provision on the basis of construction of the instant clause no objection 'in principle' was taken to the concept that property in the newly manufactured product should vest in the seller and that the buyer would not thereby be conferring a registrable charge.

Practice point

- Received wisdom would indicate that 'new product ownership' clauses are going to be difficult to establish.

- Particular attention will need to be paid to the drafting of such clauses to avoid the court construing the rights as charges.

6.6 Tracing into the proceeds of sale

Simple retention of title clause do not establish a right to trace into the proceeds of sale.

In Re Andrabell [1984] 3 All ER 407 the point was made that not all bailees are fiduciaries and therefore there may not, thereby, be a right to trace.

6.6.1 Retention of Title and Proceeds of Subsales - a New Area of Uncertainty by Robert Ribeiro

For every step forward in creating some semblance of certainty in this area of the law, the courts have taken two steps backwards. Following the Romalpa case some 15 years ago, it had been assumed that, since a seller of unmixed and unchanged goods had been able not only to recover the unsold goods, but also the proceeds of subsales in that case, others would be able to do so, on a similar basis, provided always that the clause in question had been properly drafted and incorporated into the relevant contract.

In Romalpa [1], the result was brought about by reading one part of the clause together with another part of the same clause so as to imply into the first part of the clause not only the power to sell but also the obligation to account in accordance with the normal fiduciary relationship of principal and agent, bailor and bailee. On the otherhand, in Hendy Lennox (Industrial Engines) Ltd v Graham Puttick Ltd [2], the absence of any statement in the clause in question expressly dealing with the proceeds of subsales was held to be fatal to a claim for such proceeds, while in E. Pfeiffer Weinkellei-Weineinkauf GmbH v. Arbuthnot Factors Ltd [3], the wording of a particular clause was such that the High Court held that its terms were inconsistent with the existence of a fiduciary relationship, and accordingly the claim for proceeds of subsales failed.

All this was beginning to look like trite law; now, with the decision of the Commercial Court in Tatung (UK) v. Galex Telesure and Others (1989) [4], a longer shadow has been thrown over the whole issue of proceeds of subsales in the context of Retention of Title.

The facts of the Tatung case may be summarised thus: Tatung (UK) Ltd had supplied electrical equipment to three companies now in receivership, and Tatung asserted rights over proceeds of subsales, hire, or hire-purchase of those goods, while the goods were in the possession of their buyers, but still owned by Tatung. A preliminary issue arose as to whether the rights claimed by Tatung in trust were valid, or void against the debenture holders as a registrable charge.

For these purposes the relevant sums were in fact proceeds of hire contracts made by the defendant companies, but the case proceeded on the basis that it made no difference whether the proceeds arose from subsales or from hire. The contracts of the original sales between Tatung and the defendant companies were in two forms, with one form of clause reserving title until the goods, together with all other sums owed, had been paid for in full, while giving the buyers power to sell, and stating that "the benefit of any such sale, and proceeds of any such sale shall belong to the Company (the seller) absolutely". The other form of contract contained a similar clause, which, as tar as proceeds were concerned, stated: "the proceeds of resale or any other dealing shall in any period preceding payment of the full price as aforesaid be held by the buyer in a separate account as trustee thereof for the company".

Phillips J. in the Commercial Court held that in each case the interest of the seller was a security created by contract, and thus was a charge. Each charge was "created" by the defendant companies when they conferred security over their property upon Tatung, and as such it was a registrable charge within the Companies Act [5]. As the charges had not been registered they were void for non-registration.

This decision raises the following questions for lawyers and all concerned with retention of title:

(1) Should they continue to persevere with existing clauses, on similar lines to the clauses used in the above case, in the hope that this trial of a preliminary issue was incorrectly decided? Such an argument is not impossible: other High Court decisions on retention of title have been reversed on appeal, notably Clough Mill Ltd v. Martin [6].

(2) Should they redraft clauses in the search for a new form of wording that will overcome the arguments raised in the Tatung case? Unfortunately the Tatung decision contains statements which make it difficult to be optimistic in this area, but it is also fair to say that there is no logical reason why a seller of goods should not be able to reserve title to proceeds of subsales if that is what the parties genuinely have agreed.

(3) The alternatives to the above are either to abandon all attempts to claim proceeds of subsales ahead of other creditors, or to register the security as a charge under the Companies Act 1985. These are commercial decisions to be calculated in accordance with criteria of risk and cost-effectiveness.

Nothing in the Tatung decision alters, or indeed is capable of altering, the ruling of the Court of Appeal in Clough Mill Ltd v. Martin that simple retention of title, in relation to goods only, is not a registrable charge, and is thus enforceable on well understood principles. We are therefore concerned with the extension of these principles to proceeds of subsales. Can the principles be adapted or stretched to do this?

The problem lies in the inherent contradiction between the judgments in the different cases. It will be recalled that in the Hendy Lennox case [7], the claim for proceeds failed because the clause made no express mention of proceeds or a fiduciary relationship. It may therefore come as a surprise that the reason given in Tatung as to why the claims failed was precisely the opposite, namely that there was express mention of proceeds, and of a fiduciary relationship. The argument ran as follows: a registrable charge is a charge created by the buyer. The buyer created rights as to the proceeds of subsales in favour of the seller, when the buyer contracted to confer those rights on the seller. The Romalpa case was distinguishable on the ground that in that case the relevant rights were not expressly conferred on the seller, but were implied from the wording of another part of the clause not directly applicable to the situation.

A situation where you are 'damned if you do' something, as well as 'damned if you don't', is clearly nonsensical. Fortunately the High Court has no power to overrule the decision of the Court of Appeal in the Romalpa case, nor can the High Court in Tatung have intended to make a major change to the fundamentals of commercial law, in particular the law of principal and agent, which can be restated briefly, so far as applicable to the particular problem, in the words of Roskill LJ, in the Romalpa case:

"Now, the crucial facts to my mind are two: first, that the defendants were selling goods which the plaintiffs owned at all material times; and, secondly, that cl. 13 as a whole is obviously designed to protect the plaintiffs in the event of later insolvency . . .

I see no difficulty in the contractual concept that, as between the defendants and their subpurchasers, the defendants sold as principals but, 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. If an agent lawfully sells his principal's goods he stands in a fiduciary relationship to his principal and remains accountable to his principal for those goods and their proceeds." [8]

In the same case, Megaw LJ added:

"It is not a power to sell for the defendants' own account, but it is a power to sell for the account of the plaintiffs."[9]

If these principles are still good law, some conclusions may be ventured, although it must be stressed that what follows is in no way an attempt at drafting an effective retention of title clause, nor is it offered as specific advice to any reader:

(1) If I am the owner of goods, I am free to place those goods in your hands on the basis that they remain mine, either absolutely, or until a certain event, such as payment by you, occurs.

(2) I may also give you instructions, under a contract between us, as to how you may or may not use those goods. I may, for example allow you to sell the goods for your own account. Or I may prohibit subsales. Or I may say that, if you sell the goods, you may do so only for my account, and not for your own account.

(3) If a customer of the owner of goods, whether the customer is a buyer or a bailee or hirer, deals with the goods for his own account, the proceeds belong in law to that customer. Any security conferred by that customer over those proceeds is liable to be construed by the Courts as a 'charge', which would require registration under the Companies Act 1985. If it is not registered it is liable to be held void. This approach is consistent with the principles set out in the Pfeiffer case, and in the Tatung (UK) case.

(4) However, there have been countless occasions when agents and other bailees of goods have disposed of goods placed in their custody and have been held liable to account for the proceeds of those goods, without there having been any suggestion that the duty to account amounts to a registrable charge. The logic of this must be that no charge arises because the proceeds never belong to the agent or bailee at all: they belong to the owner of the goods all along. This, of course, is the basis of the Romalpa case, in which the seller of goods succeeded in recovering the proceeds of subsales.

It ought not to be beyond the ingenuity of lawyers to use these principles to create a duty to account for proceeds of subsales without at the same time creating a registrable charge. Nor, incidentally, ought it to be beyond the ability of the Courts to draw a clear distinction, once and for all, between what is and what is not a registrable charge, so that businesses may go about their business with rather more confidence than is at present possible.

References

1. Aluminium Industrie Vaassen BV v. Romalpa Aluminium Ltd (1976) 1 WLR 676

2. (1984) 1 WLR 485

3. (1988) 1 WLR 150

4. (1989) BCC 425

5. Companies Act 1948, Section 95; Companies Act 1985, sections 395, 396.

6. (1984) 1 WLR 1067; reversed on appeal (1985) 1 WLR 111

7. (1984) 1 WLR 485

8. (1976) 1 WLR 676, at 689

9. (1976) 1 WLR 676, at 694

Reference to WLR are to the Weekly Law Reports. Permission to quote the passages from the Romalpa case has kindly been given by the Incorporated Council of Law Reporting for England and Wales.

6.7 Insolvency Act 1986 implications

The effect of s.10-11 Insolvency Act 1986 is that no steps may be taken to repossess the goods under a retention of title clause without leave of the court once a petition for an administration order is made and during the currency of the order if it is made. In such cases the rights contained in the retention of title clause are 'frozen'.

The administrator has power under s.15(2) Insolvency Act 1986 to dispose of the goods subject to a Romalpa clause if such action would promote the object of securing the future of the company as a going concern but in such cases the administrator must account to the seller for the net proceeds of sale to be applied towards the sum owed by buyer to seller. The statute goes on to provide for shortfall positions.

Sole traders and unincorporated business are not affected by the Companies Act charge registration provisions.

The Bankruptcy Act 1914 was repealed in its entirety by the Insolvency Act 1985 and the Insolvency Act 1985 has been replaced by the Insolvency Act 1986 which does not contain the 'reputed ownership' provision.