Retention Of Title Clause

A retention of title clause (also called a reservation of title clause or a ''Romalpa'' clause in some jurisdictions) is a provision in a contract for the sale of goods that the title to the goods remains vested in the seller until the buyer fulfils certain obligations (usually payment of the purchase price).

Purpose

The main purpose of retention of title ("ROT" or "RoT") clauses is 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''.
Simple ROT clauses are generally effective in protecting sellers' interests in Hong Kong, but in some cases a clause would not be enforceable.

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 (instead of reserving title to the whole thing) 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 (e.g. a quantity of oil, or grain).
:* Many jurisdictions allow the buyer to re-sell the goods before title has passed to him (often this is the only way that he can pay the seller). 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 (e.g. raw thread is worked into cloth) or mixed with other raw materials to form a new product (e.g. silica is used to make glass).
:* 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.

There are four categories of ROTs, namely simple clauses, all monies clauses, proceeds clauses and mixed goods clauses. All monies clauses reserve title in ''all'' goods supplied to a buyer, until the buyer has settled ''all'' outstanding invoices from the seller. One benefit of an all monies clause is that specific goods held at the buyer's premises do not need to be match to specific unpaid invoices.

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 shall remain vested in and shall not pass to until the purchase price for has been paid in full and received by .

''A longer form clause:''

:#Title to shall remain vested in and shall not pass to until the purchase price for has been paid in full and received by . Until title to passes:
:## shall have authority to retake, sell or otherwise deal with and/or dispose of all or any part of ;
:## and its agents and employees shall be entitled at any time and without the need to give notice enter upon any property upon which or any part are stored, or upon which reasonably believes them to be kept;
:## shall store or mark in a manner reasonably satisfactory to indicating that title to remains vested in ; and
:## shall insure to their full replacement value, and arrange for to be noted on the policy of insurance as the loss payee.
:#Irrespective of whether title to remains vested in , risk in shall pass to upon delivery.

Case list

*'' Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd'' 9761 WLR 676
*'' Re Bond Worth Ltd'', 980 Ch 228
*'' Re Peachdart Ltd'' 984Ch 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'' 9843 All ER 982, explaining how a simple clause operates.
*'' Indian Oil v Greenstone Shipping'' 9873 WLR 869
*'' E Pfeiffer v Arbuthnot Factors'' 9881 WLR 150
*'' Compaq Computer v Abercorn'' 991BCC 484, which drastically reduced the possibility of a proceeds of sale-style retention of title clause ever succeeding. In this case, the existence of a fiduciary relationship was denied on a 'true construction' of the contract, despite the terms of the contract clearly providing that there was to be such a relationship (the contract stipulated that the bailee, the buyer, was to be the agent of the seller, the bailor, thereby construing a fiduciary relationship)
*''Armour v Thyssen Edelstahlwerke AG'', 991AC 339, 9912 AC 339 - a House of Lords case which upheld the validity of a retention of title clause Chung, K.
The Perfect Antidote
''Skrine'', published 31 March 2016, accessed 16 November 2022
*'' Chaigley Farms Ltd v Crawford, Kaye and Grayshire Ltd'', 996BCC 957: title was extinguished when there was a significant change to the nature of the goods

General and cited references

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Citations

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Business law
Contract law
Contract clauses
English law
Insolvency