Retention of Title Clauses

For this reason, retention of title clauses attracted criticism. The Cork Report highlighted that such clauses would “undermine the existing supply of credit” for the reasons given above. Furthermore, the report noted that such clauses would cause difficulty for receivers of an insolvent company that are trying to keep it operating because creditors could make claims for existing supplies. The Law Commission also recommended that retention of title clauses should be registered like security interests because they are in effect that.

(ii) Irreconcilability with the doctrine of equitable tracing

As explained above, the retention of title clauses employ the use of equitable tracing as illustrated in Romalpa. It was established in Re Diplock that the claimant or seller needs be in a fiduciary relationship with the buyer and needs to have an equitable proprietary interest goods sold before it may trace in equity.

Judicial support for the decision in Romalpa has not been strong. There are two reasons for this. First, the facts in the latter case were not consistent with a fiduciary relationship because the buyer kept the proceeds of a further sale. Second, the initial buyer was not under a fiduciary to account for the proceeds of the further sale. This is inconsistent with the initial seller’s equitable proprietary interest in the goods. These arguments were accepted by the court in Re Andrabell Ltd when it rejected the initial seller’s claim to the proceeds of the further sale of goods. For the same reasons, the courts have gone further and held that the duty to account should be a contractual and not a fiduciary one. This is manifest in the decisions in Tatung (UK) Ltd v Galex Telesure Ltd and Compaq Computers Ltd v Abercorn Group Ltd.

(iii) Factual difficulty in proving a claim

Even if the effectiveness of a retention of title clause is not contested, the seller may fail to obtain a remedy because of the factual difficulty of establishing a proprietary claim. This occurs because of the limits of equitable tracing – it is difficult for the seller to retain title to goods sold that would be used in a manufacturing process. Once the goods undergo that process, they may lose their identity and this makes tracing in equity impossible. 

Even if the seller wishes to trace the value of the manufactured good, he faces a practical difficulty because of the nature of the manufacturing process. The quantity of raw material used to manufacture the final product fluctuates from batch to batch and this makes it impossible to assign a proportion of the value of the final product to the initial seller.

The case of Borden (UK) Ltd v Scottish Timber Products Ltd explains and is authority for the two propositions above.

Arguments in favour of the existence of retention of title clauses

(i) Commercial utility

Whilst there have been many objections to the existence and operation of retention of title clauses, one should not deny their commercial utility. Such clauses may operate as a method of corporate rescue. With the retention of title clause in place, sellers would be more willing to sell to a company in distress because the retention of title is effective as a security interest. This extension of further supplies would be a lifeline to a company in distress and may allow it to overcome trading difficulties. It is submitted that the courts, in making the final decision whether or not to enforce retention of title clauses, should weigh the commercial benefit of the latter against the risk that companies may incur further indebtedness.

(ii) Respect for the contractual freedom of parties

It is in the tradition of the English common law to respect the contractual freedom of parties to make their own agreements. This principle was illustrated in Printing & Numerical Registration Co v Sampson. This factor should weigh in favour of the courts’ recognition of retention of title clauses.

How objections to retention of title clauses may be overcome

(i) Creation of a trust over the proceeds of sale by the buyer

It was explained above that retention of title clauses sometimes fail because the tracing in equity is not effective where a good loses its identity after being consumed in the manufacturing process. The High Court of Australia devised a method to overcome this constraint in Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd. There, the court allowed a retention of title clause to operate as an agreement for the initial buyer to create a trust in favour of the initial sellers over the proceeds of the sale of the manufactured product.

However, this decision is questionable and may not find favour with the English courts because it only brings one back to fundamental objection to retention of title clauses – that the buyer of goods should not owe the seller any fiduciary duty because such a duty would be incompatible with the buyer’s keeping of the proceeds for his own benefit.

(ii) Retention of title clauses should not be construed as unregistered charge

The courts need not construe retention of title clauses as unregistered charges. This would allow the requirement imposed by section 395 of the Companies Act 1985, that charges should be registered, to be sidestepped. Conceptually, this is not difficult because the legal basis for holding that retention of title clauses are unregistered charges is questionable. It may be argued that such clauses do not create a charge because charges only exist where rights are conferred by the chargee. In the case of the buyer and seller, the seller’s interest is created contractually and not conferred by the buyer.

(iii) Contractual stipulation

Owing to the many objections to retention of title clauses, Bridge LJ in Borden suggested that the seller should not rely on such clauses to acquire rights in the finished product. Instead, the seller should do so by express contractual stipulation. That the same effect in law may be achieved by changing the way in which a contract is drafted suggests that the courts may been excessively concerned with the form and not the substance of retention of title clauses.

(iv) Retention of title clauses to be subject to registration requirement

Last but not least, the courts may treat a retention of title clause as a form of security interest that would be subject to a registration requirement in accordance with section 395 of the Companies Act 1985. This approach is favourable because it would allow such clauses to operate as a means of corporate rescue, whilst at the same time not having the effect of misleading a company’s creditors as to the solidarity of the company.

Conclusion

(i) Recognition of retention of title clauses

Owing to the various objections to retention of title clauses, the courts are now reluctant to recognise a clause that reserves the seller’s property in goods sold. Such clauses are likely to be construed as intending only to vest legal ownership of manufactured product in the buyer subject only to a registrable charge, as was the case in Re Peachdart.

(ii) Compliance with the requirements of tracing in equity

The courts have also reached a compromise position that complies with the requirements of equitable tracing. Where goods remain identifiable, a reservation of title clause will be valid without registration. Where goods are lose their identity and are consumed in a manufacturing process, the retention of title clause is not effective.

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