Retention of Title Clauses

15 October, 2008

RETENTION OF TITLE – A SELLER’S PROTECTION AGAINST AN INSOLVENT BUYER

What is a retention of title clause and why is it important?

A retention of title clause (sometimes called a Romalpa clause after the first leading case on the subject) is designed to provide protection for a seller who is unable to obtain payment for goods which have already been delivered to the buyer. The retention of title clause will provide that, although physical possession of the goods has passed to the buyer, title to the goods is retained by the seller.

A seller will commonly seek to rely on a retention of title clause where the buyer becomes insolvent. In these circumstances, unless the seller can successfully enforce the retention of title clause and reclaim the goods, the ownership of the goods will be have passed to the buyer on delivery by virtue of the Sale of Goods Act 1979 (as amended) leaving the seller as an unsecured creditor for the outstanding debt and unlikely to be able to recover the money owed to it by the buyer.

 

Drafting an effective retention of title clause

The clause should provide that the seller retains ownership of the goods until it has received full payment for the goods. It is important to ensure that a retention of title clause is carefully drafted, so that the clause is effective and that both the legal and beneficial title are retained as the reservation of either equitable or beneficial title alone will not be sufficient.

The clause should also provide that:
- the seller is entitled to enter the buyer’s premises to repossess the goods and the buyer should be required to give access;
 – the buyer should be obliged to store the seller’s goods separately and identify them as belonging to the seller; and
 – the buyer should allow the seller access to its premises to verify that the good have been stored correctly. This is particularly important where goods of a generic nature are being supplied.

The terms of business should also include a list of insolvency related events which will trigger the seller’s right to demand payment for the goods (if not already due) and to repossess them.

 
What happens if the buyer owes the seller money for more than just those goods?

It is possible to include an all monies clause into the retention of title clause. This will provide that the seller reserves ownership of the goods supplied until the buyer has paid all monies owed to the seller, not just the money owned for those particular goods. The effect of an all monies clause is that all of the goods supplied by the seller, whether they have been paid for or not, will belong to the seller until the buyer has settled all invoices. In practice this avoids the need to relate specific goods at the buyer’s warehouse with specific unpaid invoices.

There has been much debate in the past as to the enforceability of an all monies clause against a liquidator or administrator. However, a recent House of Lords decision has held that such a clause would be enforceable. This decision was in relation to a Scottish law case does and so while it is a strong persuasive authority, it is not technically binding on the English courts. In view of this, it is advisable to incorporate the all monies clause in a separate sub-clause from the basic retention of title clauses so that it could be severed from them if it were ever held invalid by a court.

 
Will a retention of title clause be effective where the goods have been mixed or combined with other goods?

If the goods have been mixed or combined with other goods while in the buyer’s possession then it is necessary to consider whether the original goods can be separated from the product or process in which they have become incorporated. If the goods can be separated, then a correctly worded retention of title clause should mean that the seller retains title to the goods. However, if the goods have been used in such a way that the original goods no longer exist, for example, where the seller supplies the buyer with resin which is used in the manufacture of chipboard, the resulting new product (the chipboard) will belong to the buyer and any retention of title clause which purports to reserve rights in the new goods to the seller which will be ineffective without registration.

 

Can the money owed to the seller be recovered if the buyer has sold the goods to a third party?

It is possible to include provisions in the retention of title clause which provide that where the buyer sells goods to a third party before the seller has been paid for such goods, the seller can claim the money owed to it from the proceeds of sale received by the buyer from the third party purchaser. This is known as a “proceeds of sale” clause.

The provisions of a proceeds of sale clause should expressly state if they are intended to create a fiduciary relationship between the parties and will normally include a requirement that on the sale of the goods the proceeds of sale should be retained for the benefit of the seller until full payment has been received. Such clauses are unlikely to be successful unless worded so as to provide that the sale proceeds are to be retained in a separate account for the seller’s benefit. Otherwise it is not possible to identify which payments relate to which particular contracts or goods and therefore funds cannot be readily identified as belonging to one seller or another.

There have been a number of cases where the courts have held that certain proceeds of sale clauses create a charge by the buyer in favour of the seller which is void if it is not registered at Companies House. In view of this, it is extremely difficult to draft an effective proceeds of sale clause and it is inadvisable to include a clause of this nature in a terms of business document without taking specialist legal advice.

 
Limitations on the effectiveness of retention of title clauses

It is important to note that there are a number of limitations on the effectiveness of retention of title clauses, including:

  • If the buyer is a company against which an application for an administration order has been made, no steps can be taken by the seller to repossess goods under a retention of title clause prior to the hearing of the application without the consent of the court;
  • if an administration order is made against the buyer company no steps can be taken by the seller to repossess goods under a retention of title clause while the order remains in force;
  • a retention of title clause will be of little or no practical benefit where the goods supplied are perishable.

 

Incorporation of a retention of title clause

Regardless of how well drafted a retention of title clause is, in order to be able to rely on it it needs to be incorporated into the contract between the buyer and seller. One way of doing this is for the seller to send a copy of its terms of business to the buyer and to ask the buyer to return a signed copy of the terms before the buyer’s order is processed. This is not always possible and is not essential but the seller will need to show that both parties understood that they were trading on the seller’s terms of business and that the seller had drawn the buyer’s attention to those terms of business before the contract was entered into.

 

Summary

A well drafted retention of title clause can provide a seller with valuable rights in circumstances where a buyer is fails to pay for goods which it has received. However, the law in relation to retention of title clauses is ever changing and care (and appropriate specialist legal advice) should be taken when drafting these clauses to ensure they operate effectively and that any terms of business containing such clauses are regularly reviewed so that they can be amended, if necessary, to reflect any recent changes in the law.

 

Reviewed in 2015