Title retention clause

A retention of title clause (also called a Romalpa clause in some jurisdictions) is a provision in a contract for the sale of goods that the title to the goods remains vested in the seller until certain obligations (usually payment of the purchase price) are fulfilled by the buyer.

Purpose

The main purposes of retention of title clauses are to ensure that where goods are supplied on credit, if the buyer subsequently goes into bankruptcy, the seller can repossess the goods. They are often seen as a natural extension of the credit economy; where suppliers are expected to sell goods on credit, there is a reasonable expectation that if they are not paid they should be able to repossess the goods. Nonetheless, in a number of jurisdictions, insolvency regimes or credit arrangement regimes prevent title retention clauses from being enforced where doing so would upset administration of the regime.[1]

Retention of title clauses are mandated in the European Union by Article 9 of the Late Payments Directive,[2] and sellers' ROT rights are recognized by Article 7 of the Insolvency Regulation.[3]

Especially prevalent in Germany,[4] these clauses are permitted in the United Kingdom by s.19 of the Sale of Goods Act 1979, which expanded upon the 1976 judgment of the Court of Appeal of England and Wales in Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd.[5]

In contrast to English law,[6] the common-law jurisdictions in Australia, Canada, New Zealand and the United States have instituted the concept of "security interest", under which ROT clauses may need to be registered in order to have effect:[7]

Legal analysis

Although title retention clauses are conceptually very simple, they have become increasingly widely drafted, which has resulted in the courts in a number of countries striking down the clauses, or recharacterising them as the grant of a security interest. It has consequentially been noted that "the practical outcome of a series of later cases has put it beyond doubt that 'extended' title reservation clauses will not work."[11] Several particular problems have been identified:

  • If for example, the clause reserves only part of the title to the seller (instead of reserving title to the whole thing) then in many jurisdictions this is recharacterised as an equitable charge, and is often void if certain registration requirements are not complied with.[12]
  • Problems can also arise where the goods sold are mixed with other goods of a similar nature, so that they are no longer identifiable (e.g. a quantity of oil, or grain).[13]
  • Many jurisdictions allow the buyer to re-sell the goods before title has passed to him (often this is the only way that he can pay the seller). In many jurisdictions such an onward sale passes good title to the subsequent purchaser, and the original seller loses title despite the clause[14]
  • Where the seller tries to have a clause which provides that, if the buyer re-sells the goods, then the proceeds of sale of the goods shall be held on trust for the seller, this can be recharacterised as a registrable charge, which may also be void for non-registration.[15]
  • Another frequently litigated problem occurs where the goods which are subject to the clause are then either improved (e.g. raw thread is worked into cloth) or mixed with other raw materials to form a new product (e.g. silica is used to make glass).[16]
  • In some countries, where a clause purports to retain title until, not only the purchase price, but also any other debts of the buyer to the seller are paid in full, such clauses have been struck down for non-compliance with security registration requirements in those jurisdictions.

Sample clauses

Retention of title clauses will obviously vary from country to country, and even within countries they will usually be specialised to the form of industry used in, and the type of goods which are sold. The following are just two examples of the types of clause which can be seen.

A shorter form clause:

  1. Title to {the Goods} shall remain vested in {the Seller} and shall not pass to {the Buyer} until the purchase price for {the Goods} has been paid in full and received by {the Seller}.

A longer form clause:

  1. Title to {the Goods} shall remain vested in {the Seller} and shall not pass to {the Buyer} until the purchase price for {the Goods} has been paid in full and received by {the Seller}. Until title to {the Goods} passes:
    1. {the Seller} shall have authority to retake, sell or otherwise deal with and/or dispose of all or any part of {the Goods};
    2. {the Seller} and its agents and employees shall be entitled at any time and without the need to give notice enter upon any property upon which {the Goods} or any part are stored, or upon which {the Seller} reasonably believes them to be kept;
    3. {the Buyer} shall store or mark {the Goods} in a manner reasonably satisfactory to {the Seller} indicating that title to {the Goods} remains vested in {the Seller}; and
    4. {the Buyer} shall insure {the Goods} to their full replacement value, and arrange for {the Seller} to be noted on the policy of insurance as the loss payee.
  2. Irrespective of whether title to {the Goods} remains vested in {the Seller}, risk in {the Goods} shall pass to {the Buyer} upon delivery.

Case list

Further reading

Notes

  1. ↑ For example, in the United Kingdom, where an administration order is made with respect to a company, section 11 of the Insolvency Act 1986 prevents goods being repossessed without the leave of the court.
  2. ↑ "Directive 2011/7/EU". 16 February 2011. on combating late payment in commercial transactions (recast), replacing Article 4 of "Directive 2000/35/EC". 29 June 2000. on combating late payment in commercial transactions
  3. ↑ Regulation (EU) No 1346/2000 of 29 May 2000 on insolvency proceedings
  4. ↑ Davies 2006, pp. 13–15.
  5. ↑ [1976] 1 WLR 676
  6. ↑ Bridge et al. 1999, p. 633.
  7. ↑ Duggan 2011, p. 654.
  8. ↑ Davies 2006, pp. 15–18.
  9. ↑ Art. 1497 CCQ
  10. ↑ Peter J. Cullen (2011). "Canada". In Alexander von Ziegler. Transfer of Ownership in International Trade. The Netherlands: Kluwer Law International BV. p. 73. ISBN 978-90-411-3134-8.
  11. ↑ Bridge et al. 1999, p. 639.
  12. ↑ For example, in England in Re Bond Worth Ltd [1980] Ch 228 such a clause was held to be void as it had not been registered within 21 days as required by section 395 of the Companies Act 1985
  13. ↑ In most common law jurisdictions, so long as the clause prohibited mixing in this manner, the rule is that the buyer and the seller jointly own the whole mixture as tenants in common, see Indian Oil v. Greenstone Shipping [1987] 3 WLR 869
  14. ↑ For example, in England this is the effect of section 25(1) of the Sale of Goods Act 1979, and section 2(1) of the Factors Act 1889
  15. ↑ In England, see E Pfeiffer v. Arbuthnot Factors [1988] 1 WLR 150, although a differently worded clause was distinguished and upheld in Compaq Computer v. Abercorn [1991] BCC 484
  16. ↑ Generally speaking, in England, the law has been consistently applied that if the retention of title clause purports to apply to the new substance which has been made, then it takes effect as a charge and would be void if not registered, see for example, Re Peachdart [1984] Ch 131
This article is issued from Wikipedia - version of the 12/25/2013. The text is available under the Creative Commons Attribution/Share Alike but additional terms may apply for the media files.