Retention of Title

Retention of title clauses affords adequate protection for the seller. Discuss. - Justin Santiago

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 property in the goods remains vested in the seller until certain obligations (usually payment of the purchase price) are fulfilled by the buyer. These clauses first appeared in Aluminium Industrie BV v Romalpa Aluminium.

Retention of title clauses are a device to protect the seller against the buyer’s insolvency. If the buyer becomes insolvent, a seller who has a valid retention of title clause will have a significantly improved position and enables the seller to recover goods that are unsold or moneys that have been paid into a separate account from the sale of goods.

However in practice they provide sellers with rather less protection than might be expected due to several obstacles namely difficulties in recognising such clauses and distinguishing them from charges, practical difficulties in identifying goods covered by the clauses and the fact that goods will remain at the seller's risk until additional clauses are inserted:-

1. Difficulties in recognising such clauses as incorporated in a contract

The use of Romalpa clauses has been criticised in Borden (UK) Ltd v Scottish timber Products Ltd where Templeman LJ said : It is therefore surprising that this court looked with sympathy on an invention designed to provide some protection for one class of unsecured creditors, namely unpaid sellers of goods although there is no logical reason why this class of creditor should be favoured as against other creditors such as the suppliers of consumables and services.

His argument also stems from the fact that Retention of title clauses are not required to be registered as a charge under S.365 of the Companies Act 1985 and are enforceable without being registered : Armour v Thyssen unlike the four types of consensual security: pledges, contractual liens, charges and mortgages which are created by the buyer and can be registered under Companies Act S395. The clauses are seen as an anomaly in that it gives a proprietary right and is enforeceable without being registered and that because the full legal title remains with the seller, the buyer simply does not have the capacity to create a charge.

Such clauses can be confused with charges that are not registered. This point was argued in the case of Re Bond Worth where the contract of sale provided that equitable and beneficial ownership of the goods remain in the sellers until the price is paid. It was held by Slade J that these provisions were consistent with the creation of a floating charge and it was void for non-registration as a charge under the Companies Act. Romalpa clauses can be thought as “sham devices” masquerading as equitable charges.

2. Practical difficulties in relation to the identity of the physical goods :-

a. Because possession is with the buyer problem of obtaining access to the buyer’s premises or other place where the goods are believed to be in order to identify them

b. Distinguishing the seller’s goods from those supplied by others or those that have been paid for from those that have not

c. Retention of title caluse will cease to be effective once the goods have lost their identity by becoming incorporated into something else : Borden v Scottish Timber Products – resin becomes incorporated into chipboard.

d. The goods may have been sold.

3. Goods will remain at the seller’s risk until property in them passes to the buyer

Therefore a clause stating that the goods will be at the buyer’s risk from the moment of delivery or else to cover by insurance for loss or damage caused after delivery by accident, act of God or act of a third party has to be inserted.

Additionally other clauses will have to be included :-

- ‘manufactured goods’ clause, whereby the seller retains title to the goods even after they have undergone a manufacturing process;
- ‘proceeds clause’, whereby the seller is entitled to the proceeds of a sale of the goods to a third party; and finally
- ‘all monies’ clause under which the seller retains to the goods until all the debts owed by the seller to the buyer are extinguished.