Eleanor Timber Supplies Ltd (“ETS”) sells timber to its customers, some of whom are regular customers while others just make a single purchase. ETS’s terms require payment within 30 days of the date of delivery. Some of ETS’s customers resell the timber but others use it to manufacture various goods which they then store for subsequent sale.

Although ETS has written terms of sale they do not include a retention of title clause.

Advise ETS why they ought to incorporate a retention of title clause into their standard terms of sale and what protection such a clause might provide.

Answer

This question requires a detailed discussion of retention of title clauses and clear advice to ETS as to why they should include one in their contracts.

You should explain that by properly incorporating a retention of title clause into their contracts of sale, it will go a long way to protect them in the event of goods supplied not being paid for. Section 19(1) SGA 1979 provides that where there is a contract for the sale of specific goods (or where goods are subsequently appropriated to the contract) the seller may, by the terms of the contract or appropriation, reserve the right of disposal of the goods until certain conditions are fulfilled, and in such a case, notwithstanding the delivery of the goods to the buyer, the property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled. In this context, the condition that ETS would want to impose would be to reserve to themselves property in the goods until payment has been made.

You should then explain the principles from the Romalpa case (Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676) and point out that these clauses are often referred to as Romalpa clauses.

ETS might also wish to assert a right to the proceeds of sale. Good answers will explain that in such a situation a number of cases subsequent to Romalpa have criticised its reasoning (for example, Re Weldtech Equipment Ltd [1991] BCC 16; Compaq Computer Ltd v Abercorn Group Ltd [1991] BCC 484; and Pfeiffer Weinkellerei-Weineinkauf GmbH & Co v Arbuthnot Factors Ltd [1988] 1 WLR 150). In these cases, the seller’s claims to the proceeds of resale were held to be void as an unregistered charge. Phillips J went even further in Tatung (UK) Ltd v Galex Telesure Ltd (1989) 5 BCC 325 suggesting that Romalpa was wrongly decided as the seller’s interest should have been held to be a charge.

As we are told that ETS’s customers either resell the timber or use it in the manufacture of goods, you should explain that if the timber has been incorporated into manufactured goods, then notwithstanding the retention of title clause, ETS will have difficulties in reclaiming the finished goods in the event of non-payment because the goods sold will have changed their identity and can no longer be said to be the property of ETS (see cases such as Re Peachdart Ltd [1984] Ch 131, Re Bond Worth Ltd [1980] 1 Ch 228, Borden (UK) Ltd v Scottish Timber Products Ltd [1981] 1 Ch 25 and Modelboard Ltd v Outer Box Ltd [1993] BCLC 623. However, if the timber sold could be easily separated and identified as belonging to ETS then following Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd [1984] 1 WLR 485, ETS might succeed in its recovery.

You should point out that, ordinarily, a simple retention of title clause is not a security interest and therefore does not need registering (Clough Mill Ltd v Martin [1985] 1 WLR 111). This is because they do not give the seller the kind of security usually demanded by commercial lenders such as banks (which do need registering). The intention behind a retention of title clause is merely to prevent title passing to the buyers before they have paid the price and not to assert continuing property rights in the goods. However, if ETS wishes anything more than a simple retention of title clause (such as a continuing property interest in the goods), then those rights will need to be registered under s 859A of the Companies Act 2006, failing which they will be invalid as against a liquidator or other creditors.

You should also explain that although there are clear benefits to sellers incorporating retention of title clauses into their contracts of sale there are also dangers. FG Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd [2014] 1 WLR 2365 illustrates how sellers can be denied a claim for the price under the contract by virtue of such a clause. This is because although the goods may be in the physical possession of the buyer, since the seller has retained ownership of them until payment, he cannot bring an action for the price under s 49(1) SGA because that remedy is only available where property in the goods has passed to the buyer. Furthermore, in Wilson the court held that s 49(1) provided an exclusive (rather than a permissive) remedy for the price and held that no claim for the price could be brought unless s 49 applied which it did not in this case. This left the seller without any effective remedy against the buyer. You would do well to point out the irony of this given that the entire purpose of a retention of title clause is to provide seller protection. You should explain that sellers can get round this problem by making the price payable on a “day certain”, irrespective of delivery, so as to ensure they do not fall foul of the protection they thought they had secured when incorporating their retention of title clause. This will then satisfy the requirement in s 49(2) SGA.

Finally, you will also need to explain that the decision in Wilson was disapproved by the Supreme Court in PST Energy 7 Shipping LLC and Another v O.W. Bunker Malta Ltd and Another (the “Res Cogitans”) [2016] UKSC 23 and that this case demonstrates yet another unintended consequence of a retention of title clause in that it could cause the entire transaction to fall outside of the SGA, resulting in the seller failing to secure the advantages intended by such a clause and not being able to sue for the price under s 49 as well as the buyer losing the benefit of the SGA’s implied terms. In the Res Cogitans, Lord Mance stated that there were three key issues that needed to be determined. First, was the contract a contract of sale within the meaning of s 2(1) of SGA? As bunkers’ suppliers know that they are for use prior to payment being made. OWB’s contract with the Owners therefore cannot be regarded as a straightforward agreement to transfer the property in the bunkers to the Owners for a price under s 2(1). It was a sui generis agreement, with two aspects: first, to permit consumption prior to any payment being made and without any property ever passing in the bunkers consumed; and second, if and so far as bunkers remained unconsumed, to transfer the property in the bunkers remaining to the Owners in return for the Owners paying the price for all of the bunkers, whether consumed before or remaining at the time of payment. Lord Mance went on to explain that even if the contract were to be analysed as a contract of sale, in that it contemplated the transfer of property in any bunkers unused at the date of payment, OWB could not owe any obligation to transfer property in bunkers consumed before payment. It would cease to be a contract of sale if, and when, all such bunkers were consumed before payment. Second, if the contract was not a contract of sale within the meaning of s 2(1), was it subject to any implied term that OWB would perform or had performed its obligations to its supplier, in particular by paying for the bunkers timeously? Lord Mance held that OWB’s only implied undertaking as regards the bunkers which it permitted to be used, and which were used by the Owners in propulsion prior to payment, was that OWB had the legal entitlement to give such permission. No other implied undertaking was necessary. Third, should the Court of Appeal’s decision in Wilson be overruled insofar as it held that where goods are delivered under a contract of sale, but title is reserved pending payment of the price, the seller cannot enforce payment by an action for the price. Section 49(1) SGA enables an action for the price where the seller has transferred property, with or without delivery, and the buyer has failed to pay the price due. The question here is whether s 49 excludes any claim to recovery of a price outside its express terms noting that s 49(2) relaxes only partially the strictness of s 49(1). Lord Mance stated that courts should be cautious about recognizing claims to the price of goods in cases not falling within s 49 although this leaves at least some room for claims for the price in other circumstances. For example, the price may be recovered in respect of goods undelivered which remain the seller’s property but are at the buyer’s risk and are destroyed by perils of the seas or by fire. His Lordship declined to set the precise limits for the circumstances in which the price may be recoverable outside of s 49. He stated that had the contract between OWB and the Owners been one of sale, he would have overruled Wilson on this point holding that s 49 is not a complete code of situations in which the price may be recoverable under a contract of sale. In the Res Cogitans, however, the price was recoverable by virtue of its express terms in the event which had occurred, namely the complete consumption of the bunkers supplied.