LAW RELATING TO RETENTION OF TITLE

Retention of Title Clauses are generally used by suppliers of goods in an attempt to protect themselves against a buyers Insolvency.

By incorporating a Retention of Title Clause into their Terms and Conditions of Sale, suppliers purport to retain ownership in the goods which have been supplied to the buyers until they have been paid for. In this way, should the buyer default in payment, the seller will seek to rely upon his Retention of Title Clause and either re-possess the goods supplied or attempt to seize the proceeds from the sale of the said goods.

The suppliers aim is to give himself some priority over the general body of unsecured Creditors in the event that the buyer becomes insolvent and cannot pay for the goods supplied.

The Liquidator of an insolvent Company will encounter many claims by Suppliers attempting to enforce their Retention of Title clauses.

When considering a Creditors Retention of Title claim, there are two main factors to consider:-

1. Is the Retention of Title Clause properly incorporated into the Contract for Sale / Agreement between the parties?

2. Is the Retention of Title Clause effective – both from a practical perspective i.e. are the goods the subject of the Retention of Title Clause identifiable and retrievable? and from a legal perspective i.e. is the Retention of Title Clause valid or is it simply an attempt by the seller to create a Charge over the buyers assets which, if not registered, will be void for failure to register pursuant to Section 99 of the Companies Act 1963?

Is the Retention of Title Clause properly incorporated into the Contract for Sale/Agreement between the parties?

The basis in Law for the use of Retention of Title Clauses is governed by Section 19 (1) of the Sale of Goods Act which provides:

“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. In such cases, notwithstanding the delivery of the goods to the buyer, or to a carrier to other bailee or custodian for the purpose of transmission to the buyer, the property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled”.

It is therefore possible for a Seller to insert a term into a Contract of Sale between himself and a Buyer providing that property in the goods shall not to pass until a specified condition is fulfilled. This condition maybe that the purchase price of the goods must be paid in full or that the buyer must discharge all indebtedness to the seller.

The most important point to remember is that the term or condition must form part of the Agreement between the seller and the buyer. The buyer will not be bound by the Retention of Title Clause unless, at the time the Contract was made he knew or ought to have known of its existence and the seller took all reasonable steps to bring it to his notice.

Case Law on this topic clearly indicates that it is up to the seller who is seeking to rely upon a Retention of Title Clause to prove that it has been incorporated into the Contract. The Courts will consider the facts of each individual case. The best evidence is a formal acknowledgement and acceptance by a buyer of the seller’s Terms and Conditions however as such formal procedures are rare in the business world, other more common factors to consider are:-

i.) How was the Retention of Title Clause brought to the attention of the Buyer? Was it clearly printed on all Purchase Orders/Invoices/Delivery Dockets?
ii.) Was the Retention of Title Clause clearly printed on the Account opening Forms/Credit application Forms?
iii.) Consider the course of dealings between the parties. The length of time the parties have been doing business together, the relationship between the parties. It should not simply be assumed however that because a buyer and a seller have been dealing with each other for a number of years that the buyer is actually aware of the Retention of Title Clause, this is especially relevant in circumstances where the seller has only recently introduced the Retention of Title Clause into his Terms and Conditions of Sale. It is important that all contractual documents are examined to ensure that the Retention of Title Clause has been properly incorporated into the Contracts / Agreement and that the buyer was fully aware of same when making the bargain.

2. Is the Retention of Title Clause effective and valid or is it simply an attempt by a seller to create a Charge which is void for failure to register pursuant to Section 99 of the Companies Act 1963?

Once you are satisfied that the Retention of Title Clause has been properly incorporated into the Contract between the buyer and the seller, the next issue to decide is whether same is effective – both legally and practically;

There are three main types of Retention of Title Clause;
• The Simple Clause
• The All Sums Due/ Current Account Clause
• The proceeds of sale Clause

The effectiveness and scope of the Retention of Title Clause depends on the type of clause used to by the seller;

i) The simple Retention of Title Clause:
As its name suggests, this clause simply purports to reserve Title in the goods in the seller until the buyer has paid for them.

Examples of simple Retention of Title Clauses are:-

“Ownership of the goods, shall only be transferred to the purchaser when the full amount of the purchase price has been discharged”

“Unless the Company shall otherwise specify in writing, all goods sold by the Company to the purchaser shall be and remain the property of the Company until the full purchase price thereof shall be paid to the Company”

“Goods remain the property of the Company until paid for in full”

Consequently, if a seller supplies goods to a buyer and the buyer does not pay for the goods in full, the seller can take back his goods as ownership has not passed. The only caveat is that, with a Simple Retention of Title Clause, the seller must be in a position to identify the stock which he is claiming by reference to an unpaid invoice, in other words, the seller must be in a position to prove that the stock which he is re-claiming on foot of his Retention of Title Clause is the actual stock for which payment is outstanding. This will involve checking Purchase Orders and Invoices as against Delivery Dockets, Serial numbers and Markings.

Things can become a little more complicated however, where the goods supplied to the buyer under a Simple Retention of Title Clause are sold on, or used, by the buyer before payment is made.

It is generally understood that a buyer is free to use the goods supplied as he pleases before payment in full is made. The Retention of Title Clause need not expressly state that the buyer is free to use the goods pending payment as the Courts will often imply such a term in order to give business efficacy to the Contract.

The effectiveness of the Simple Retention of Title Clause in such a scenario will depend on whether the goods sold on, or used, by the buyer remain identifiable and retrievable;

• Unidentifiable Goods:
If the goods supplied are used by the buyer e.g. in a manufacturing process and thereby totally lose their identity, then the simple Retention of Title Clause will cease to have effect and the supplier will be unable to rely upon it. An example commonly used involves the supply of resin to a buyer under a contract containing a simple Retention of Title Clause. Before payment is made, the buyer uses the resin to make chipboard. Once manufactured, the resin is unidentifiable in the chipboard. The effect of the Retention of Title Clause is to reserve title in the resin only so long as it remains in identifiable form. Once it is used in the manufacturing process, the resin ceases to exist and the seller’s title in it also ceases to exist. If the buyer fails to pay the seller, the seller has no claim to the chipboard.

• Identifiable and Retrievable:
If goods supplied under a simple Retention of Title Clause are used by a buyer or are incorporated by a buyer into other goods before payment is made but the goods remain readily identifiable and removable, then the Retention of Title Clause will continue to operate in respect of the incorporated goods. In such cases the goods supplied can simply be removed and returned to the seller. For example, if a seller supplies engines to a buyer and, before payment is made to the seller, the buyer incorporates the engines into generators, if the supplier remains unpaid he can reposes his engines by removing same from the generators. This is because the goods over which he has retained title remain identifiable and retrievable.

• Identifiable but irretrievable:
If the goods supplied by a seller under a simple Retention of Title Clause remain identifiable but are irretrievable, then the Retention of Title Clause again is of no effect. For example, if a seller supplies window frames to a construction company which are used in the construction of a house before payment is made, while the window frames are clearly identifiable, they are not retrievable without causing damage to the glass / exterior of the building. In such circumstances, the supplier cannot re -posses his goods and his Retention of Title Clause, whilst valid, will be of no effect.

The leading Irish Case of Somers –v- Alan confirms that the simple Retention of Title Clause will be effective to reserve title in goods provided they remain identifiable and retrievable. Such clauses are legally effective and do not create a Charge over the goods supplied.

ii) Current Account / All sums due clauses:
The second type of clause purports to reserve title or ownership in the seller not only until the purchase price for the actual consignment of goods has been paid but also any outstanding sums owed by the buyer to the seller in respect of other transactions.

This type of clause can either be added onto the simple of Retention of Title Clause or can stand alone. Examples of the current account / all sums due clauses are as follows:-

“The ownership of the material to be delivered by the seller will only be transferred to the purchaser when he has met all that is owing to the seller no matter on what ground”

“The goods shall remain the sole and absolute property of the Company until unconditional payment in full has been received by the Company for the goods and all other monies due to the Company.”

At first glance, it might appear as though the “all sums due clause” ought to be treated as creating a Charge as the seller is effectively seeking to create a security for all sums owed to him by the seller. The problem associated with the “all sums due clause” was highlighted in the UK case of “Cloughmill Limited –v- Martin” where it was held:-

“The difficulty with the present condition is that the Retention of Title applies to material, delivered and received by the buyer, until payment in full for all the materials delivered under the Contract has been received by the seller, the effect is therefore that the seller may retain his title in the material still held by the buyer even if part of that material has been paid for.”

The Court of Appeal in the “Cloughmill” case upheld the validity of the clause. The Judge noted that while the effect of the clause was very similar to a Charge, no Charge was actually created by the buyer because the seller had at all times retained title in the goods.

The view adopted by the Court of Appeal in this case has been the subject of much criticism with many commentators believing that the effect of the clause is, in reality, the creation of a security which ought to be registered under Section 99 of the Companies Act, 1963.

There has been very little case law in Ireland on the topic and what case law there is, is not exactly on point. In the case of “Re: Stokes –and- McKiernan Limited”, the Irish High Court held that the “all sums due clause” relied upon by the supplier was not effective however, his finding was made on the particular facts of the case and the Judge did indicate that a “clear” “all sums due clause” would have been given effect by the Court.

In the “Frigoscandia –v- Continental Irish Meat” case, the “all sums due clause” was upheld by Mc William J. who noted that a Charge could not be created until the buyer became the actual owner of the goods and - as such a transfer of ownership was precisely what the “all sums due clause” prevented – no charge was created..

There is a great deal of unease surrounding the validity of the “all sums due clause” and, in particular, whether a seller can create what is essentially a security for himself which does not have to be registered under Section 99 of the Companies Act, 1963. It is however settled law in the United Kingdom that such a clause is valid and there is no indication in Irish case law that a contrary position would be adopted here. As matters currently stand, the “all sums due clause” is a legally valid clause which may be enforced by suppliers.

Consequently, suppliers with a valid “all sums due clause” are entitled to re-possess stock supplied to a Company up to the value of their outstanding account notwithstanding that such stock may have been paid for by the Company already. The suppliers must account to the Liquidator / Company for any surplus over and above the amount of the indebtedness of the Company to them.

Again, the supplier must be in a position to prove to the Liquidator / buyer that the outstanding amount is lawfully due and owing on foot of outstanding invoices and that the goods which the seller seeks to re-possess are actually goods supplied by the seller to the Company. Unlike the simple Retention of Title Clause however the seller does not have to identify particular items of stock by reference to specific outstanding invoices.

iii) Proceeds of Sale Clauses:
A question which sometimes arises is whether a supplier, under his Retention of Title Clause, has the right to claim the proceeds from the sale of goods which he has supplied to a buyer and which the buyer – before making payment – has sold on.

Examples of such clauses are as follows:-

“Equitable and Beneficial Ownership shall remain with the seller until full payment has been received, or until prior re-sale in which case the sellers beneficial entitlement shall attach to the proceeds of re-sale or to the claim for such proceeds.”

When considering the “proceeds clause”, three questions arise:-

1. Does the original Agreement / Contract for Sale expressly empower the seller to satisfy the debt out of the proceeds of sale?

2. Are the proceeds identifiable or have they been paid into the buyers bank account and mixed with other funds, in other words, can the seller “trace” the money owed to him into the buyer’s bank account?

3. Assuming that the seller has a right to payment out of the proceeds of sale and assuming he has a right to trace into the buyers bank account – does this clause involve the creation of a Charge over the proceeds of sale which must be registered?

With regard to question 1, from a consideration of relevant case law, it would appear that even where the agreement between a seller and a buyer does not expressly oblige the buyer to account to the seller for the proceeds from the sale of the goods in the event of their being re-sold, it would appear that a buyer will normally be under such an obligation. The Courts have implied this term in order to give business efficacy to Contracts and to give effect to the purpose of the Retention of Title Clause which is, after all, to protect the seller against a buyer’s non-payment.

With regard to question 2, it is generally accepted by the Court that something more than a debtor/creditor relationship is required for the remedy of tracing to be available. The remedy will only be available to a person who is entitled to the beneficial or equitable interest in the property as against a person who holds the property in a fiduciary capacity.

It is clear that a seller using a Retention of Title Clause will retain at least the equitable interest in the goods. How do we establish however, if the buyer holds the goods in a fiduciary capacity?

In a number of UK cases it was held that if, under the terms of the original agreement, the buyer was free to deal with the goods or the proceeds from the sale of the goods as he pleases, then no fiduciary relationship existed.

In the Irish case of “Re: Stokes -and- McKiernan” McWilliam J. considered a “proceeds of sale clause” and held that, as the condition was perfectly clear, the buyer was bound to hold the proceeds of sale on trust for the seller and the seller was thereafter permitted to follow and attach the proceeds of sale.

While the Irish case of “Stokes -and- McKiernan” appears to have adopted a broader approach, same is not generally regarded as good and settled law on the topic and the Courts are unlikely to hold that a fiduciary relationship exists unless the following factors can be identified:-

1. An indication that the buyer is selling the goods supplied as agent for the sellers or on the sellers account;
2. An express acknowledgment that the relationship between the buyer and the seller is a fiduciary one;
3. A requirement that the buyer is to keep the goods supplied by the seller separately from his own – in such a way as to clearly show that same belong to the seller-;
4. A requirement that the buyer is to keep the proceeds of sale separate from other monies possessed by him i.e. in a separate account

With regard to question 3, the biggest problem facing a seller claiming the right to trace into the proceeds from the sale of goods supplied by him, is that of identification. If the buyer has sold the goods in question to a sub-purchaser as part of a “basket of goods” then the seller will find it difficult to establish which proceeds arise from the sale of his particular goods. In addition if the proceeds have been lodged into the buyer’s bank account and mixed with other funds, then it may be impossible to identify the proceeds which relate specifically to the particular goods supplied.

In the Irish Supreme Court Case of “Carroll Group Limited –v- G & JF Bourke Limited” the seller purported to retain title over cigarettes supplied to G&JF Bourke Limited until they were paid for and also purported to retain title over the proceeds from the sale of the cigarettes. Under the agreement between the parties, the proceeds of sale were to be retained in a separate account and were to be held “On Trust”. This would suggest the existence of a Fiduciary Relationship such as to allow the seller to avail of the equitable remedy of Tracing. However, the separate bank account was never actually used and the proceeds from the sale of the cigarettes were lodged into the buyer’s general bank account. Of the monies held in the bank account only about 5% represented proceeds from the sale of Carroll’s cigarettes. Nonetheless Carrolls’ sought to trace the proceeds from the sale of its cigarettes into the buyer’s general bank account.

In the Supreme Court Murphy J. held that not all of the monies in the buyer’s bank account related to the proceeds from the sale of cigarettes supplied by Carrolls and that the bank account simply represented a fund to which Carrolls could have recourse to discharge the monies due. As Carrolls could not be entitled to the entire of that fund, Murphy J. held that the clause purported to provide Carrolls with a security over the fund and that same possessed all of the characteristics of a Charge which was void for want of registration under Section 99 of the Companies Act 1963.

It would appear from available case law that – notwithstanding the existence of a fiduciary relationship between the parties - where proceeds of sale cannot be specifically identified either because they have been lodged to a mixed fund or into a general bank account, the Courts will regard a claim by a seller to the proceeds from the sale of his goods as a Charge which will be void if not properly registered.

The Bona Fide Purchaser:

In a recent liquidation a question arose as to the effectiveness of a Retention of Title Clause as against a customer of the buyer to whom the goods were supplied.

In that case, certain major electrical suppliers sold goods to a Company under a Retention of Title Clause. The Company sold on certain items of stock to its customers before making payment in full to the supplier. A number of customers had paid deposits on the goods but had not collected same from the shops. The Company subsequently went into liquidation and the question arose, as to the rights of the suppliers’ vis-à-vis the customers of the Company.

Normally, a buyer of goods which are subject to a Retention of Title Clause cannot effect a valid sale of the said goods on to a third party i.e. one cannot sell that which he does not own.

However, if the buyer of goods from a supplier re-sells those goods before payment is made to the seller, the sub-purchaser (in this case the customers) can get good title to the goods despite the existence of the Retention of Title Clause provided he has bought the goods (I.e. paid a 100% deposit) and provided he has bought the goods in good faith and without notice of the sellers Retention of Title claim. The rights of the customer who has paid 100% of the purchase price will defeat the sellers Retention of Title claim in such circumstances. Unfortunately, the customers who have paid a deposit representing a portion of the purchase price are not protected and the seller has the right to re-possess the goods in question. The Customer cannot complete the sale and is simply an unsecured creditor in respect of the payment made.