Loading...
topic
HOME  /  PUBLICATIONS  /  RETENTION OF TITLE CLAUSES: SECURING PAYMENT IN CONTRACTS OF SALE

Publications

Search Publications
Retention of Title Clauses: Securing Payment in Contracts of Sale

Retention of Title Clauses: Securing Payment in Contracts of Sale

Prior to considering the nature, effect and legal implications of so-called retention (or reservation) of title clauses, it would perhaps be prudent, for contextual purposes, to briefly address the general contractual/statutory position governing the passing of title in a contract for the sale of goods. In the event that the parties themselves have agreed on the timing of the passing of ownership from vendor to buyer, this will be duly respected and enforceable in law. However, in the absence of any express provision on the issue of the passing of property, the matter will be viewed, assessed and deduced in the light of the broader terms and conditions of the contract, the conduct of the parties and the circumstances prevailing at the time the contract of sale was entered into. In the event that the matter of the passing of title cannot be inferred in this manner, due regard is to be given to the applicable provisions of the Sale of Goods Law 1994 (Law 10 (I)/1994, as amended), which are as follows:

Where the contract relates to the sale of specific goods in a deliverable state, ownership will pass at the time the contract is entered into.

In circumstances where the contract deals with the sale of specific goods under which a seller must do something to the goods to put them in a deliverable state, title will be transferred to the buyer when this is effected and the buyer is notified accordingly.

In a contract for the sale of specific goods in a deliverable state, pursuant to which it is incumbent on the seller to weigh, measure, test or do some other act in respect of the goods for the purpose of determining their price, title will pass when this is fulfilled and the buyer is informed accordingly.

If the operative agreement of sale embraces non-specified goods or future goods by description and in a deliverable state whereby the goods are appropriated unconditionally under the contract, title will be considered to have passed at the time of the appropriation.

In the event that that the goods are made available to the buyer with a view to securing his approval, or are sent to him on a sale or return basis or on other such agreed terms, title shall transfer to the buyer when he signifies his approval or acceptance or upon the performance of any act under which the particular transaction in question is to be executed.

As previously indicated, these statutory provisions will be applicable in the absence of any express agreement to the contrary. Accordingly, and subject to the incorporation of an appropriate clause to this effect, it is open for the seller to retain equitable and beneficial ownership even after delivery of the goods has been effected, and despite the fact that the buyer now has possession. It is evident that, in doing so, the seller has at his disposal a useful protective device which, notwithstanding the buyer’s inability/refusal to pay, or insolvency, will enable him to retrieve his goods and afford him priority over other secured or unsecured creditors. This, in essence, is achieved by ensuring that the relevant supply transaction shall, inter alia, be governed by an appropriately drafted retention of title clause by which the seller shall assert his proprietary rights over the products which constitute the subject matter of the operative agreement of sale. In effect, the seller will resort to relying on this clause with a view to ensuring that the legal and beneficial ownership of the goods shall continue to be vested in him until such time as the purchaser (who nevertheless enjoys possession) has discharged his payment obligations under the terms of their agreement (in the interim however, the element of risk will ordinarily rest on the shoulders of the buyer who would undertake responsibility for any loss or damage to what is essentially the seller’s property). However, the matter is by no means as straightforward as it might initially appear to be. To gain a clearer perspective of the issues involved, due consideration must necessarily be given to the operation, implications, complexities and legal challenges which may conceivably be encountered by virtue of a seller’s reliance on clauses of this nature (also commonly referred to as Romalpa clauses following the landmark case of Aluminium Industrie Vaassen v Romalpa Aluminium Ltd [1976] 1 WLR 676, which initially addressed the validity and enforceability of such precautionary stipulations as a means of safeguarding vendors’ interests, particularly in circumstances where the buyer becomes insolvent).

Whilst the Romalpa decision clearly endorses the permissibility of utilising retention of title clauses, there are nevertheless certain key issues which may dilute or nullify their effectiveness. The prospect of this occurring necessarily raises a number of key questions which must necessarily be addressed accordingly. Indeed, to the potential detriment of a seller, the matter may take on a different dimension in circumstances where the buyer has resold the goods or where he has effectively mixed them with other products/materials as part of a manufacturing process that may have been undertaken by him to produce finished goods. These issues will be further considered below.

A simple retention of title clause may be reinforced by a stipulation to the effect that title to the goods shall be reserved pending payment of “all monies” which are due by the buyer to the seller. This may be to the latter’s advantage in circumstances where goods are sold by way of multiple consignments. An express statement to this effect will seek to offer the seller relatively wider protection in terms of ensuring that where there is a continuing debt (which has not at any stage been discharged to a nil balance), the clause shall nevertheless be effective in respect of all goods that are supplied by the seller. In essence, this would of course mean that if at any point in time the outstanding debt is settled (whereby title shall pass to the buyer), the clause would permit retention of title only in relation to those goods which are supplied thereafter. It should be borne in mind that in the absence of an all monies provision (which would essentially limit and narrow down the effectiveness of the clause to one of specific application), it would be incumbent on the seller to show that particular goods in the hands of the buyer correspond to those covered by specific invoices – a task that would require some means of identification such as the allocation of product codes or serial numbers for cross-reference purposes. It is evident from this, that from a purely practical standpoint, an all monies stipulation will operate to ensure that the seller is not obliged to specifically align the goods with particular unpaid invoices. In fact, and irrespective of how the debt may have arisen, he will be at liberty to retrieve any goods which may have been delivered to the buyer (on credit terms), subsequent to the last zero balance on the latter’s account. The notable upshot of the foregoing is that, irrespective of whether the goods supplied have been paid for or not, the seller will be regarded as the legal and beneficial owner until such time as the buyer has discharged his payment obligations in respect of all invoices. As previously mentioned, the seller is effectively absolved from engaging in what might otherwise entail the tedious task of having to tie in particular goods in the buyer’s possession with those relating to and reflected in specific unsettled invoices. However, it is pertinent to point out that all monies stipulations (often referred to as “all sums” or “all liabilities” clauses) do not appear to have received the sympathy of the judiciary and one can by no means be dogmatic on the prospect of a seller successfully securing the return of the goods. All monies clauses were held by the House of Lords in Armor v Thyssen Edelstahlwerke AG [1990] 3 All ER 481, to be enforceable without the formality of registration on the basis that, if the clause was valid, it would preclude the transfer of title to the buyer who, not being the owner, would not be in a position to grant a charge over the goods. The case was however considered under Scottish law and regarded as being of persuasive authority only. Accordingly, in view of its uncertain legal status, it would be prudent, by way of a precautionary measure, to draft an all monies stipulation as a stand-alone clause in order to preserve the validity of the reservation of title clause. This would cater for the likelihood that the all monies provision might be judicially regarded as an unregistered charge. In such circumstances, the offending all sums stipulation may be duly severed from the agreement of sale without affecting the enforceability of the basic retention of title clause (a severance clause would be equally as effective in achieving this, as will be explained below).

Notwithstanding the relatively broad scope and rather imaginative nature of the clause in Romalpa, the goods delivered by the seller (aluminium foil), retained their original form throughout, and effectively remained in an unmixed state when the seller sought their return under the terms of the retention of title clause. Under the circumstances, the court was quick to conclude that as the foil was still intact, it was effectively under the seller’s ownership (despite being in the buyer’s possession) and therefore beyond the receiver’s reach when the buyer was subsequently declared insolvent. However, be that as it may, matters may conceivably take on a more problematic dimension where a clause purports to embrace not only materials or components supplied by the seller, but also all products manufactured or assembled by the buyer which might incorporate these as part of a subsequent manufacturing process to produce finished goods. In such circumstances, a question arises as to whether the seller is at liberty to claim back what he has sold to the buyer. Case authority would appear to be consistent in allowing the seller to retrieve his goods provided they have not been altered to the extent that they are beyond recognition and incapable of being detached from the finished item. In Borden (UK) Ltd v Scottish Timber Products Ltd [1979] 3 All ER 961, where the subject matter of the sales contract (resin) was no longer identifiable and incapable of separation from the manufactured product (chipboard), the sellers were effectively precluded from claiming the latter or the proceeds of sale thereof (a contrary conclusion was understandably reached in Hendy Lennox (Industrial Engines) v Grahame Puttick [1984] 2 All ER 152 where the components supplied by the seller (engines) could in fact be detached from the finished items (generators) and thereby restored to their original state).

Is it possible for a seller to avoid the impact of the Borden decision with a view to retaining ownership over mixed goods? Case authority would suggest that this would not be feasible in the absence of appropriate registration as a charge. In essence, if the seller’s goods are incapable of being extricated from manufactured products (which have now have taken on an entirely new form), the seller’s goods would, for all intents and purposes, cease to exist and thereby fall outside the intended scope of the Romalpa clause. The issue in point here, is that goods taking on a new form might well consist of materials or parts which were not only supplied by the seller, but also made available by the buyer himself (or indeed, by other sellers). In this event, it is conceivable that the original seller’s “contribution” to the final product would be relatively small – a position which, if he were to be granted title, would effectively enable him to gain a financial windfall equivalent to the inflated value of any new goods produced by the buyer. This would constitute a clear case of unjust enrichment which would allow the seller to gain an overly generous pecuniary advantage which would be entirely disproportionate to the value of the goods initially been supplied by him.

The seller might wish to extend his protection by the incorporation of a so-called proceeds of sale stipulation, which would reinforce the effectiveness of a retention of title clause. In this way, the seller would seek to assert his rights in respect of any monies paid to the buyer in the event that the latter should resell the goods supplied to him by the seller. The Romalpa case sought to validate such a clause in terms of declaring that the buyer was under a fiduciary duty to the seller to account for any proceeds which, having been derived from the onward sale of the goods by the buyer, were to be regarded as having being held in trust for the seller. Notwithstanding this approach, subsequent case law has adopted the view that a tangible fiduciary relationship could only arise in circumstances where the seller acts as agent for the buyer or where a bailor/bailee arrangement is firmly in place. Failing this, any attempt to rely on a proceeds of sale clause would be unsuccessful and likely to be rendered void in the absence of being registered as what would most likely be judicially perceived as a charge over book debts. In any event, and by way of avoiding the invalidation of a retention of title clause on this basis, it would be prudent to include rights over proceeds issues as independent stand-alone stipulations (much like those relating to all monies clauses) which may be severed from the contract if ultimately found to be unenforceable. Alternatively, an appropriately drafted severance term could be included in the operative agreement of sale to safeguard against the possible invalidation of any proceeds-related references, be they expressed as part of a whole retention of title clause or duly incorporated as a sub-clause.

Even in circumstances where a retention of title clause may per se be valid and enforceable, it is nevertheless incumbent on the seller to ensure that it is properly incorporated in the contract with the buyer. As such, due care should be taken not to include such a term in what might be considered to be post-contractual documentation – an occurrence which (subject to being able to establish a regular course of dealings on this basis), would unequivocally deny the seller any right to reserve title to any goods supplied to the buyer.

A right of entry term in a contract of sale would add flesh to a retention of title clause as this would authorise the seller to enter the buyer’s premises with a view to repossessing the goods should the relevant provisions of the agreement be triggered upon the buyer’s failure to meet his obligations or in circumstances where he might be rendered insolvent.

The inclusion of a reservation of title clause in a buyer/seller transaction may conceivably have broader adverse implications for third parties who are not privy to the operative sales agreement. By way of example, the buyer may have previously obtained a loan which was secured by granting the lender a floating charge over stock-in trade which from time to time was supplied to him by a seller, subject to a valid and enforceable Romalpa clause. Should such a clause have subsequently been triggered by the buyer’s insolvency, the seller could effectively claim ownership over such goods, which would thereby erode the lender’s security and leave him exposed to the risk of ultimately being denied repayment of the loan amount along with any interest that may have accrued.

Whilst retention of title clauses may serve as a useful credit protection mechanism, due regard should be had to key factors which may well neutralise their legal effectiveness. Such an unfortunate outcome may well be due to a seller’s overly enthusiastic effort to draft such stipulations as wide as possible, thereby running the risk that they may be rendered void and unenforceable for one or more of the reasons reflected in this article. Having regard to the fact that this area of law is relatively untested in the Cyprus dispute resolution arena, it is prudent that appropriate professional advice is sought beforehand to ensure that transactional reservation of title stipulations are expressed in a manner which eliminates the undesirable prospect of being rendered legally ineffective when sellers seek to rely thereon to protect their financial, and commercial interests.

Related Publications

Cyprus, over the last few years has attracted continues to attract HNWI who are looking to relocate to another country for tax, business or personal reasons.
On July 11, 2024, the Cypriot Parliament enacted the EU Blue Card, designed to attract highly skilled non-EU nationals to work and reside in Cyprus and across the European Union.
The amended Sale of Property (Specific Performance) Law (Law N. 132/(I)/2023) came into force on 12/12/2023, aiming to protect buyers’ interests.
Over the past years, Cyprus has become an attractive destination and a global hub for venture capital investments. This insight will delve into the legal aspects surrounding venture capital in Cyprus.
Cyprus stands out as a prime destination for establishing trusts, offering a robust legal framework with significant tax incentives.