Protecting the seller - make it work for you

That well worn adage cashflow is king is reinforced during difficult economic times, yet no matter how vigilant a supplier is, there is always a risk of the purchaser’s insolvency once the goods are supplied.

No doubt a cautious supplier will already be taking the usual steps to mitigate a possible bad debt including checking the purchaser’s creditworthiness, instigating credit insurance (if possible), and ensuring terms and conditions are strict when it comes to payment. What else can a supplier do short of turning away business? A retention of title clause incorporated into terms of trading could be the answer.

A ROT clause is commonly referred to as a Romalpa clause, which is the reference to the famous twentieth century case Aluminium Industrie Vaassen B.V. v. Romalpa Aluminium [1976] 1 W.L.R. 676. The case was an important decision as it introduced the concept of ‘extended reservation of title’ into English law, and although the past few decades has seen an attrition of the principles laid down, it nevertheless continues to have far reaching effects in commercial law.

History

The concept of reservation of title in English law has been about since the late nineteenth century. In the House of Lords case of McEntire v Crossley [1895] AC 457, Lord Herschell LC said that: “…the parties have in terms expressed their intention and said that the property shall not pass till the full purchase-money is paid.”

Fast forward 81 years later and the concept of retaining the title of goods until payment was made, has been ‘merely’ re-stated by the Romolpa case; it is therefore surprising that the seemingly welcoming ground laid down by McEntire, the ROT clause was virtually unknown and allowed a buyer to do what it wished to do with the goods, as if they were its own.

Aluminium Industrie Vaassen was a dutch company that supplied aluminium foil to the English company, Romalpa Aluminium. After receiving large quantities of aluminium foil, Romalpa became insolvent and went into liquidation, still owing a large sum to Aluminium Industrie Vaassen, who then sought to rely on its Clause 13: “The ownership of the material to be delivered by A.I.V. will only be transferred to purchaser when he has met all that is owing to A.I.V., no matter on what grounds.”

A significant quantity and value of the foil remained untouched and still in Romalpa’s possession, and Aluminium Industrie Vaassen successfully argued that its Clause 13 enabled it to take back into its possession the unsold foil. The Court held that: “In order to give effect to the obvious purpose of cl 13, that clause was to be construed as conferring on the defendants a power to sell unmixed foil and also as imposing on them an obligation to account to the plaintiffs for the proceeds of sale unless and until all moneys owing from the defendants to the plaintiffs had been paid. Although, so far as sub-purchasers were concerned, the defendants sold the unmixed foil as principals, so far as the plaintiffs were concerned, the foil was the plaintiffs’ property which the defendants were selling as agents for the plaintiffs to whom, by virtue of their fiduciary relationship as agents and bailees, they remained fully accountable. It followed therefore that the plaintiffs were entitled to trace the proceeds of sale of the unmixed foil and to recover them in priority to the secured and unsecured creditors.”

Passing of Title

In construction and engineering contracts, there are many different parties involved and the goods could have passed to many buyers before the original seller encounters a problem – just think of a sub-sub-contractor. It can be a difficult task to decide who actually owns the goods, and ownership will often pass at quite an early stage – and before goods are paid for.

Unless otherwise stated in a contract, for the sale of goods, title passes from the seller to the purchaser when the parties intend it to pass (section 17 Sale of Goods Act 1979), which is normally upon delivery.

Many construction contracts will be for the supply of labour and materials and hence, will be governed by the Supply of Goods and Services Act 1982, under which title again passes when the parties intend it to pass.

Upholding the Romalpa Clause today

The Romalpa clause will only bite providing it is written into the contract. A seller cannot reclaim its goods simply because it has not received payment, even if the goods have not been sold-on or used. Standard terms of sale are therefore critical.

Subject to certain criteria being met, the courts will uphold a valid Romalpa clause providing it can be demonstrated that an agreement has been properly made between the seller and purchaser – and the normal rules for an agreement is as appropriate here. In other words, there must be a clear offer and acceptance, and that no counter-offer has been made prior to performance, including where the purchaser has acknowledged the order, but then refers to its own terms and conditions; but terms on an invoice will be too late.

There are many types of Romalpa clause, including:

1. Simple or reservation of title clauses
2. Debt clauses
3. Charge clauses
4. Mixed or processed clauses

Simple or reservation of title clauses aim to preserve the seller’s title to the unpaid goods: “Until the purchase price is paid in full, title of the goods remains with the seller.” However, insolvency practitioners could claim that the goods, if remaining on the premises, have been paid for, whilst those goods already shipped out are the subject of the seller’s claims. To avoid this, the seller should have a unique identification mark on the goods.

A debt clause such as “until the price and all other sums owing by the purchaser to the seller are paid in full, title in the goods remains with the seller”, is known as an all money clause, and such clauses have received approval from the courts. There is no need for the seller to identify the goods, as it remains the owner if any debt owed to it by the purchaser is unpaid.

Charge clauses will generally fail: “Until the price is paid in full, the seller remains owner of the goods and any proceeds of their sale.” This is because the courts consider such clauses create a form of charge or security over the goods, of which must be formally registered at Companies House, whilst registration must be within 21 days of the creation of the charge, which is at the time of each and every delivery.

Mixed or processed goods clauses are rarely effective in court: “The Seller shall have ownership of the whole of the goods until payment is made in full where the goods are mixed with or incorporated in other goods before the price is paid”. This is where goods that have been supplied have been incorporated into a larger component or, fixed to premises, and hence such goods cannot easily be separated.

So ROT clauses remains good in the twentieth first century, but with caveats.

© Michael Gerard Consulting Limited
July 2010