Retention of title by the seller

It is normal commercial practice for goods to be supplied on credit: a

manufacturer may need to sell the goods they have produced before
being able to pay a supplier of the raw materials. This can create
problems for the supplier because if the buyer becomes insolvent before
payment and after property in the raw materials has passed, they
become part of the buyer’s general assets and the seller will simply rank
alongside other unsecured creditors, which will involve expense in
lodging proof of a claim and may yield little or no benefit.

To some extent the seller can guard against this possibility by not
passing the property in the goods to the buyer. If the parties do not
intend the property to pass, it will not do so, even if the buyer obtains
possession (Tank and Vessels Industries Ltd v Devon Cider Co Ltd [2009]
EWHC 1360. Commonly, the sale contract seeks to assert thisby a
retention (or reservation) of title clause in the sale contract. This is
sometimes called a Romalpa clause after the leading case, Aluminium
Industrie Vaasen BV vRomalpa Aluminium Ltd [1976] 1 WLR 676

Such a clauseis contemplated by ss.1 (4) and 26. Where there is a

contract for sale of specific goods or where, in a contract for
unascertained goods, the goods have been appropriated to the contract,
the seller may reserve the right of disposal of the goods until such
conditions as are laid down in the contract have been fulfilled (for
example, payment of the price).

Property will not pass to the buyer until the conditions aremet, even if
the goods have been delivered. Such a clause aims to prevent the goods
becoming part of the buyer’s assets in the event of insolvency.
Moreover, since the goods are not the property of the buyer they will
not be subject to any security granted to another creditor by the buyer.
But, while these attributes make the clause attractive to the seller, they
can be disadvantageous to other creditors who may be unaware that
goods in the possession of the buyer are subject to such a clause.
There is an important distinction to be made between:

A retention of title clause by which the seller retains property in the

goods and the goods do not form part of the buyer’s general assets on
insolvency.

A charge by which the buyer, who has property in the goods, grants to
the seller a proprietary interest in them as security for a debt. Here the
seller can look to those goods in the event that the debt is unpaid. But
where a company is the debtorthe charge will be void against creditors
unless it is registered.

In addition, by creating a charge the debtor company may be in breach of

agreements with other creditors. For a clause that only created a charge,
see Re Bond Worth Ltd [1980] Ch 228.

Retention of title clause provides only limited protection. If the buyer,

who is in possession of the goods or documents of title, resells, the new
buyer may acquire good title.

TYPES OF CLAUSES

It is relatively easy to write a clause into a sale contract by which the

seller retains property in the original goods, but it may be that the only
way the buyer can pay for the raw materials is to manufacture them into
a product, which is sold. The seller of steel to a carmaker will be aware
that some of that steel will be stored for later use and some will be
mixed with other goods (plastic, rubber, etc.) to make cars and the cars
will be sold. It may not be in the interests of the seller, who wishes to be
paid, to obstruct the ability of the buyer to use the goods, but if it is
contemplated that before payment the goods will lose their identity or
leave the possession of the buyer, how can the seller protect their
position?

Attempts have been made to draft clauses that transfer the seller’s
rights in the goods sold to any product made with those goods or any
money received from the sale of the goods or the product. There are
several possibilities.

i. A clause by which the seller retains property in the original goods.

ii. A clause that gives the seller proprietary rights to the proceeds of
the resale of the original goods by the buyer.

iii. A clause that gives the seller proprietary rights in the product
manufactured by mixing the original goods with other goods.

iv. A clause giving the seller proprietary rights in the proceeds of the
sale of any product manufactured with the original goods.

v. An ‘all moneys’ clause (Armour v Thyssen Edelstahlwerke AG [1991]

2 AC 339), which reserves the seller’s property in the original goods
supplied and, perhaps, rights in the proceeds of resale, the
manufactured product and the proceeds of the sale of the
manufactured product until all the debts owed by the buyer to the
seller (that is, not just the price owed for one particular sale) are
met.

These clauses often also require the goods to be stored separately from
other goods in the possession of the seller, permit the seller to enter the
buyer’s premises and remove the goods in which the seller has property,
require the buyer to keep the proceeds of any resale in a special account
separate from other funds, and purport to place the buyer under a
fiduciary duty to the seller.

Are these clauses successful?

The clauses have, generally, been effective in reserving title to the

original goods,but failed in so far as they have sought to extend the
rights of the seller beyond the goods supplied under the particular
contract. As shown in Fairfax Gerrard Holdings Ltd v Capital Bank Plc
[2007] EWCA Civ 1226, it is often the case that even though goods are
sold subject to a retention of title clause it is evident that the intention
was to permit the buyer to resell those goods.

As Simon Brown J pointed out in Four Point Garages v Carter (1985) 3 All
ER 12, it would be curious if no such implied right existed in a contract
where there is a simple retention of title clause where the purposeof the
transaction is to enable the buyer to obtain goods for resale. This
reasoning led the court in Re BA Peters plc [2008] EWHC 2205 (Ch) to
conclude that the seller had relinquished the property in the goods and
had a mere charge, which was unenforceable because it had not been
registered.

The problem is that once the goods have been resold or a new product
has been manufactured out of the goods the attempt to reserve title in
the resale proceeds or the product is, usually, characterised as a charge
(Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25.

It has been suggested that ‘where the contract seeks to confer upon the
seller a right to look for satisfaction of the price to property which is
worth more than that amount (or to a sum of money which exceeds the
price which he is owed), the courts will construe the transaction as one
involving a charge’ (See Sealy and Hooley, p.458).

Attempts to transfer to the seller property in the product manufactured

from the original goods will amount to a charge because ‘it is hardly
credible that the parties would have intended that the buyer should
abandon to the seller the value which he has added to the original sale
goods’. There are other issues: has the retention clause been
incorporated into the sale contract; can the seller identify the goods that
are subject to the clause?

Where goods are mixed with other goods in a manufacturing process,

the sellerwill be able to retain title as long as the identity of the goods
sold remains. In Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick
Ltd [1984] 1 WLR 485 the contract involved engines which were then
used in the manufacture of generators.

It was held that the seller retained title to the engines because the
process could be easily reversed so the engines had not lost their
identity. Where the manufacturing process cannot be easily reversed,
property will pass to the buyer and the clause will create a mere charge
(Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25 (Sealy and
Hooley, pp.462-63)): for example, leather made into handbags (Re
Peachdart Ltd [1984] Ch 131. In an Australian case, Associated Alloys Pty
Limited v Metropolitan Engineering and Fabrications Pty Limited (1996)
ACSR 205 at 209, it was said:
The question of whether goods which have been used in some
manufacturing process still exist in the goods produced by that process,
or have gone out of existence on being incorporated in the derived
product is, in my opinion, a question of fact and degree not susceptible
of much exposition.

When wheat is ground into flour it is reasonably open to debate whether

the wheat continues to exist; when flour is baked into bread there could
be little doubt that the flour does not. Many examples might be
encountered or imagined and each must be addressed separately. Where
goods of a homogenous character are mixed, co-ownership might be a
correct conclusion whether goods are reducible to the original materials
is not simply a matter of physics. Other perspectives have to be
considered, including the economic perspective. The scraps of leather
produced by cutting up a manufactured shoe could not in reality be
regarded as the original leather from which the shoe was manufactured.

The steel, which would be produced by cutting up the pressure vessel

and flattening and the cylindrical parts, would not be the steel, which
Associated Alloys delivered under the sale; it would be scrap steel.

An ‘all moneys’ clause may not resolve the difficulties. In Aluminium

Industrie Vaasen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676, the court
held the clause effective to enable the seller to trace into the proceeds
from sales of the goods by the buyer and found that there existed a
fiduciary relationship between seller and buyer, which is necessary to
establish tracing in equity. This aspect of the decision has been doubted
and in later cases courts have imposed constraints making such clauses
ineffective. At the core of the difficulties is that the parties cannot
designate the buyer as a fiduciary or as an agent where in reality they are
engaged in a sale (Re Andrabell [1984] 3 All ER 407; Hendy Lennox
(Industrial Engines) Ltd v Grahame Puttick Ltd [1984] 1 WLR 485 (Sealy and
Hooley, p.465-66); E. Pfeiffer Weinkellerei- Weinenkauf GmbH v Arbuthnot
Factors Ltd [1988] 1 WLR 150; Compaq Computers Ltd v Abercorn Group
Ltd [1991] BCLC 484 602).