Retention of Title Clause Contract - Coursework Example

Retention of Clause Contract The case presented involves the question of validity of retention of (RoT) clause in a sale contract. It would be useful to examine the legal position of RoT clause before discussing the case. In England Wales, Sale of Goods Act S.19 permits a seller to reserve the right ownership of the goods sold until conditions of sale are fulfilled by the buyer. Thus, a seller with enough bargaining power can impose retention of title clause by virtue of this section and a case law known as Romalpa1. There are categories of RoT clauses. (1) Simple retention of title clause which is the most fundamental one whereby the seller reserves tile to the goods that are delivered to the possession of the buyer as held in Romalpa case. This case combined both retention of title clause as well as bailment relationship between parties. In Clough Mills Ltd v Martin 2 ,there is no problem in this type of clause unless it seeks to retain equitable or beneficial ownership. In Re Bond Worth 3 , the court held that the title had already passed to buyer since it was not possible to retain equitable title although the buyer later granted back to the seller equitable charges which however was held void for want of registration. It shows that simple RoT clause is not suitable where goods sold are to be resold or manufactured into new ones. (2) The second category of clause is “all moneys clause” as an alternative to serve the purpose of retention of title until all debts of the buyer are paid to the seller rather than until payment of the purchase price as was affirmed in Armour v Thyssen 4 (3) Third category is “products clause” that aims at retaining or rather vesting title in the products made out of the goods originally supplied. But difficulty with this clause is that it serves to create as security for the goods originally purchased but becomes ineffective in the absence of registration. (4) Fourth category is “proceeds “or “tracing clause” that aims at acquiring proprietary interest in the proceeds of further sales of the buyer. This is again an ineffective clause as held in Romlpa case. Since the proceeds clause purports to create a fiduciary relationship between the parties, it requires to be registered and therefore courts have held them as registrable and as void for not having been registered. However, Romalpa case became a milestone on the law of retention of title as it held a conditional sale agreement valid even in the conditions of sold goods having been consumed or resold and the further appeal also upheld tracing of goods to the proceeds of sale by virtue of equitable tracing principles. Presently simple retention of title clauses, manufactured goods clauses, “all sums due” clauses and proceeds of sale clauses are being widely applied. To be clearer, the first category confers RoT in the original identifiable goods until payment is received by the seller. In Clough Mill Ltd v Geoffrey Martin [1984] 5 , it was held that the clause purporting to retain equitable or beneficial ownership could not be sustained for want of registration since the law required registration of equitable charges. The simple retention clause is valid only when goods are identifiable without being converted into a new form. It is further clarified that such conversion is valid if seller’s goods have not lost their identity and could be detached without damage to the goods or property as held in Hendy Lenmox (Industrial Engines) Ltd v Graham Puttick Ltd 6. Goods have been held to have lost their identity if they are used in manufacturing process and have been irretrievably mixed with other goods as held in Borden (U.K.) Ltd v Scottish Timber Products Ltd7. As such, to overcome such problems RoT clauses are drafted to include claiming of title to the goods manufactured using the original goods supplied and being treated as charges and getting registered. 8 The purpose of RoT clauses incorporated by a seller is to safeguard themselves against potential insolvency situation of the buyer subsequent to the sale of goods.9 With a RoT clause, an unpaid seller gets precedence over all other creditors. RoT clause is however complex combining the “law relating to sale of goods, bailment, agency, trusts, mortgages and charges and principles of tracing”. 10 Romalpa case law is still valid with many of its principles having been eroded by subsequent decisions especially in relation to the proceeds clause. Contrary to this position in U.K. because of political, economic and business expediency, laws of Germany and the U.S. allow proceeds clause without having to be registered. Article 9 of the Uniform Commercial Code of the U.S.A. allows RoT clause to include proceeds clause. Law recognizes only four kinds of security interests such as pledges, contractual liens, charges and mortgages all of which are different from retention of title provision. English law requires registration of certain charges without which the creditor’s position is relegated to that of an unsecured creditor. With the law relating to ROT having been almost settled, sellers can no longer sans registration incorporate proceeds and manufactured goods clauses in their ROT clauses. But a simple clause and all moneys clause will prevail.11 Reverting to the case on hand with the settled law as above, Goldcorp Ltd would be advised as under. Total value of goods sold is £ 136,000. Valuation of GT Jewellers Ltd is as below. 1 kilo Gold in their vault, stamped with Goldcorp Ltd’s seals in conformity with clause 1(a) 34,000.....................................................................................................................= £ 34,000 A tank containing 2 kilos of melted gold bullion in conformity with clause 1(b) = £ 68,000 150 gold and diamond engagement rings worth £ 5,000 each. Vide clause 1 (b) = 10,000 Proceeds of sale of gold .as per clause 1 (c)..........................................................= 25,000 Total ..........................= 1, 37,000 I As law stands today, Romalpa case is limited to benefit of simple retention clause. Thus, Goldcorp Ltd can have recourse to the property of one kilo of gold stamped with their seals. This has the backing of section 19 (1) of the Sale of Goods Act 1979 which reads the seller “can reserve the right of disposal of the goods until certain conditions are fulfilled....notwithstanding the delivery of goods to the buyer.... the property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled” (p869) 12 II It has been discussed above that the simple retention clause is valid only when goods are identifiable without being converted into a new form. It has been further clarified that such conversion is valid if seller’s goods have not lost their identity and could be detached without damage to the goods or property as held in Hendy Lenmox (Industrial Engines) Ltd v Graham Puttick Ltd. If this ratio is applied, the stock of two kilos of gold lying in a tank in melted form can also be claimed by Goldcorp Ltd even though there are no seals or any other viable evidence to show that this melted gold was converted from any stock purchased from any other seller. The case history does not reveal any such purchases other than from Goldcorp Ltd. The stock register must show that the melted gold bullion is from the stock acquired from Goldcorp who have supplied a total six kilos of gold during the three month in question. In this scenario, it cannot be said that the goods have lost their identity having been used in manufacturing process and irretrievably mixed with other goods as held in Borden (U.K.) Ltd v Scottish Timber Products Ltd as already seen above. As such, Goldcorp can safely claim this stock of gold with their proprietary interest. III As regards 150 gm gold and diamond engagement rings worth £ 5,000 each, the decision in Borden (U.K.) Ltd v Scottish Timber Products Ltd as already seen needs to be followed since diamond and gold cannot be separated without damage though the goods are separately identifiable. If they can be separated, again it must be proved that gold was manufactured from out of stocks purchased from Goldcorp. Since the products clause category would require registration, Goldcorp cannot succeed in claiming this part of the stock. IV As regards Proceeds of sale of gold .as per clause 1 (c) valued £ 25,000, since this type of charge requires registration as per case law discussed, Goldcorp cannot have recourse to this without a valid registered charge. Although Romalpa decision has validated this proceeds clause, subsequent decisions requiring disclosure of existence of a fiduciary duty of the buyer towards the seller have rendered this clause ineffective. In Compaq Computers Ltd v. Abercorn 13 a complete clause in all respects was found. Moreover, according to the Companies Act, unless a charge created by the buyer on behalf of the seller is registered, it is void. 14 In conclusion, Goldcorp can only recover £ 102,000 without valid registered charges on other claims. Bibliography Aluminium Industries Vaasen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676 In Faber Wolfgang and Lurger Brigitta, Acquisition and Loss of Ownership of Goods (Berne Walter de Gruyter, 2011) p788-790 Armour v Thyssen [1991] 2 AC 339 in Faber Wolfgang and Lurger Brigitta, Acquisition and Loss of Ownership of Goods (Berne Walter de Gruyter, 2011) p788-790 Borden (U.K.) Ltd v Scottish Timber Products Ltd [1981] Ch 25.In Faber Wolfgang and Lurger Brigitta, Acquisition and Loss of Ownership of Goods ( Berne Walter de Gruyter,2011) p788-790 Clough Mill Ltd v Geoffrey Martin [1984] 2 All ER 982 In Faber Wolfgang and Lurger Brigitta, Acquisition and Loss of Ownership of Goods (Berne Walter de Gruyter, 2011) p788-790 Compaq Computers Ltd v. Abercorn [1991] B.C.C. 484,491 In Monti Giorgio, Nejman Gilles and Reuter Wolf J , ‘The Future Of Reservation Of Title Clauses In The European Community’, International and Comparative Law Quarterly, 46/0 (1997) 866-907 < www.reuter-arbeitsrecht.de/wp-content/.../01/iclq-reuter-1997.pdf> Accessed 19 Jan 2013. Davies William, ‘Romalpa thirty years on – still an enigma?’ Hertfordshire Law Journal 4 (2) (2006), 2-23 Faber Wolfgang and Lurger Brigitta, Acquisition and Loss of Ownership of Goods (Berne Walter de Gruyter, 2011) p788-790 Hendy Lenmox (Industrial Engines) Ltd v Graham Puttick Ltd [1984] 1WLR 485 In Faber Wolfgang and Lurger Brigitta, Acquisition and Loss of Ownership of Goods (Berne Walter de Gruyter, 2011) p788-790 Insolvency Law and Practice. Report of the Review Committee. Chairman Sir Kenneth Cork In Davies William, ‘Romalpa thirty years on – still an enigma?’ Hertfordshire Law Journal 4/2 (2006), 2-23 Monti Giorgio, Nejman Gilles and Reuter Wolf J, ‘The Future Of Reservation Of Title Clauses In The European Community’ International and Comparative Law Quarterly 46/0 (1997) 866-907 < www.reuter-arbeitsrecht.de/wp-content/.../01/iclq-reuter-1997.pdf> Accessed 19 Jan 2013. Re Bond Worth [1980] Ch 228 In Faber Wolfgang and Lurger Brigitta, Acquisition and Loss of Ownership of Goods( Berne Walter de Gruyter,2011) p788-790 Read More