A retention of title clause is a provision in a contract for the sale of
goods that the title to the goods remains vested in the seller until
certain obligations are fulfilled by the buyer.
Purpose The main purposes of retention of title
clauses are to ensure that where goods are supplied on credit, if the buyer
subsequently goes into bankruptcy, the seller can repossess the goods. They are
often seen as a natural extension of the credit economy; where suppliers are
expected to sell goods on credit, there is a reasonable expectation that if they
are not paid they should be able to repossess the goods. Nonetheless, in a
number of jurisdictions, insolvency regimes or credit arrangement regimes
prevent title retention clauses from being enforced where doing so would
upset administration of the regime. Retention of title clauses are mandated
in the European Union by Article 9 of the Late Payments Directive, and
sellers' ROT rights are recognized by Article 7 of the Insolvency Regulation.
Especially prevalent in Germany, these clauses are permitted in the United
Kingdom by s.19 of the Sale of Goods Act 1979, which expanded upon the 1976
judgment of the Court of Appeal of England and Wales in Aluminium Industrie
Vaassen BV v Romalpa Aluminium Ltd. In contrast to English law, the
common-law jurisdictions in Australia, Canada, New Zealand and the United
States have instituted the concept of "security interest", under which ROT
clauses may need to be registered in order to have effect:
in the United States, states have adopted Article 9 of the Uniform
Commercial Code, which limits the clause's effectiveness
common-law provinces in Canada have adopted their Personal Property Security
Acts which operate similarly in Quebec, there is no "presumption of
hypothec", and therefore an ROT clause is not considered to be a security
interest; art. 1497 of the Civil Code of Quebec provides that "An obligation is
conditional where it is made to depend upon a future and uncertain event,"
which gives legal authority to such clauses
Australia and New Zealand have also adopted their own versions of the
Personal Property Security Act Legal analysis
Although title retention clauses are conceptually very simple, they have
become increasingly widely drafted, which has resulted in the courts in a
number of countries striking down the clauses, or recharacterising them as the
grant of a security interest. It has consequentially been noted that "the
practical outcome of a series of later cases has put it beyond doubt that
'extended' title reservation clauses will not work." Several particular
problems have been identified: If for example, the clause reserves only
part of the title to the seller then in many jurisdictions this is
recharacterised as an equitable charge, and is often void if certain
registration requirements are not complied with.
Problems can also arise where the goods sold are mixed with other goods of a
similar nature, so that they are no longer identifiable.
Many jurisdictions allow the buyer to re-sell the goods before title has
passed to him. In many jurisdictions such an onward sale passes good title to
the subsequent purchaser, and the original seller loses title despite the
clause Where the seller tries to have a clause
which provides that, if the buyer re-sells the goods, then the proceeds of
sale of the goods shall be held on trust for the seller, this can be
recharacterised as a registrable charge, which may also be void for
non-registration. Another frequently litigated problem
occurs where the goods which are subject to the clause are then either improved
or mixed with other raw materials to form a new product.
In some countries, where a clause purports to retain title until, not only
the purchase price, but also any other debts of the buyer to the seller are
paid in full, such clauses have been struck down for non-compliance with
security registration requirements in those jurisdictions.
Sample clauses Retention of title clauses will
obviously vary from country to country, and even within countries they will
usually be specialised to the form of industry used in, and the type of goods
which are sold. The following are just two examples of the types of clause
which can be seen. A shorter form clause:
Title to {the Goods} shall remain vested in {the Seller} and shall not pass to
{the Buyer} until the purchase price for {the Goods} has been paid in full and
received by {the Seller}. A longer form clause:
Title to {the Goods} shall remain vested in {the Seller} and shall not pass to
{the Buyer} until the purchase price for {the Goods} has been paid in full and
received by {the Seller}. Until title to {the Goods} passes:
{the Seller} shall have authority to retake, sell or otherwise deal with
and/or dispose of all or any part of {the Goods};
{the Seller} and its agents and employees shall be entitled at any time
and without the need to give notice enter upon any property upon which {the
Goods} or any part are stored, or upon which {the Seller} reasonably believes
them to be kept; {the Buyer} shall store or mark {the
Goods} in a manner reasonably satisfactory to {the Seller} indicating
that title to {the Goods} remains vested in {the Seller}; and
{the Buyer} shall insure {the Goods} to their full replacement value, and
arrange for {the Seller} to be noted on the policy of insurance as the loss
payee. Irrespective of whether title to {the
Goods} remains vested in {the Seller}, risk in {the Goods} shall pass to {the
Buyer} upon delivery. Case list
Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676
Re Peachdart [1984] Ch 131, if the clause applies to something not yet
made, then it is a charge and must be registered to be effective.
Clough Mill Ltd v Martin [1984] 3 All ER 982, explaining how a simple clause
operates. Indian Oil v Greenstone Shipping [1987]
3 WLR 869 E Pfeiffer v Arbuthnot Factors [1988] 1
WLR 150 Compaq Computer v Abercorn [1991] BCC
484 Armour v Thyssen [1991] 2 AC 339
Further reading Rolf B. Johnson. "A Uniform Solution to
Common Law Confusion: Retention of Title under English and U.S. Law". Berkeley
Journal of International Law 12: 99–129. Retrieved 26 November 2013.
Michael G. Bridge; Roderick A. Macdonald; Ralph L. Simmonds; Catherine
Walsh. "Formalism, Functionalism, and Understanding the Law of Secured
Transactions". McGill Law Journal 44: 567–664. Retrieved 18 November 2013.
William Davies. "Romalpa thirty years on — still an enigma?". Hertfordshire Law
Journal 4: 2–23. Retrieved 12 November 2013.
Anthony Duggan. "Romalpa Agreements Post-PPSA". Sydney Law Review 33:
645–685. Retrieved 18 November 2013. "The BExA Guide to Retention of Title
Clauses in Export Contracts". British Exporters Association. October 2005.
Notes