31 October 2013

Retention of title and paying the price

Tangled ROT clauses come unravelled

Retention of title (ROT) clauses have been controversial for over 30 years. When selling goods to a business buyer on credit, you want to keep ownership of your goods until you are paid. If the buyer goes bust, you can hope to retrieve your goods, or claim their value in priority to the unsecured creditors of the buyer. You need an express contract clause to do this: it is not a right given by the general law.
We had thought the law on ROT clauses was becoming fairly settled. The long arguments that used to accompany almost every insolvency are now reduced to a bit of wrangling with the insolvency practitioner. It is fairly settled that the basic form of ROT clause works: you retain title to your goods until they have been paid for. Fancier extensions of the clause are usually not effective. They include:
·         the “all monies” clause which purports to retain title until every debt owed to you has been paid – where there is continuous trading between the parties, this would mean that title would never pass because something was always owing
·         trying to continue ownership of the goods after they have been sold to the buyer’s customers – quite apart from practicalities, section 25 of the Sale of Goods Act says that a buyer in possession of goods with the permission of the seller can pass good title to a buyer from him
·         trust clauses, which purports to give you special rights over the proceeds of sale of the goods when your buyer sells them on. These usually amount to a charge, requiring registration at Companies House and ranking behind other charges on the buyer’s assets
·         agency clauses, which say that the buyer is not in fact buying at all, at least until he pays you, and if he sells the goods you are entitled to the full price from his buyer. If this works at all, this makes you a party to the contract with the sub-buyer and liable if anything goes wrong with the goods. In most cases it is inconsistent with the true commercial relationship and is likely to be ignored.
Two recent cases do not change this position greatly, but they do point to the importance of the drafting of the clause, and also to the fact that a clause which tries to do too much could end up not achieving anything at all. And that the law is still a mess.
Sandhu v Jet Star Retail Limited (in administration) and others is not particularly surprising. An “all monies” clause was held not to work. The surprising aspect was that the ROT clause failed completely, rather than applying just to the price of the actual goods remaining in stock. It is a very short judgment, but the reasoning seems to be that the administrators had already sold the stock before any claim was made, and the terms of the contract expressly allowed the buyer to sell the goods, and did not terminate that right upon insolvency. Therefore, the administrators were entitled to sell the goods, the retention of title ended upon sale and the administrators had done nothing wrong and so were not guilty of the tort of conversion (dealing with goods in a manner inconsistent with the owner’s rights). Had the clause been better drafted, it could have protected the seller so that he received at least the value of the goods remaining in stock at the time of insolvency, or the contract price for those goods, whichever was the lower. It is usually better to be conservative and draft your clause in a way that is likely to be effective under the current understanding of the law, rather than attempting to gain additional rights which put the whole clause at risk.
The more difficult case is Caterpillar (NI) Ltd v John Holt & Company (Liverpool) Ltd, a Court of Appeal case which I hope will be reviewed by the Supreme Court. This case again revolved around sub-sale of the goods by the buyer. The ROT clause was an “agency clause”, which purported to say that the first buyer received the goods not as a buyer, but as the agent of the seller, and sold them to the second buyer as agent of the seller. The Court of Appeal accepted, surprisingly, that this worked, and held that it meant that the first buyer was not liable to pay the sale price to the seller, as it had not bought the goods! Section 49 of the Sale of Goods Act says that a seller can sue for the price either when title to the goods has passed to the buyer, or  “the price is payable on a day certain irrespective of delivery”. As neither of these conditions applied, the seller could not sue for the price. He could probably claim damages for breach of contract, but that was outside the scope of the decision.
If this case remains good law, there are a number of steps sellers can take to improve their ROT clauses and payment clauses, including ensuring that payment is due on a “day certain irrespective of delivery” and removing any reference to agency. Clauses should either not expressly authorise resale of the goods at all, or if they do, should make sure this right does not continue following default and insolvency.

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