WEEK 11 – Retention Of Title Clause

Summary:
ROT to the original goods ok
All monies ROT Clause ok
Proceeds of sale ROT clause May be ok for proceeds from unmixed goods, not from
proceeds from sale of products
New Products ROT Clause Not ok

Before S has any chance of enforcing a ROT, The liquidator will require strict proof of:

1. The goods in B’s possession are S’s goods

General rule: There must be a mechanism through which we could identify that the goods
in B’s possession are S’s goods

Issue: Can we identify that (good) is from S, distinguish goods from other suppliers? If not,
ROT would not function to protect S.

Here, we assume that there is Marking/ packaging/ Coloured to distinguish S’s goods
from other suppliers.
2. Has the ROT clause been incorporated into the contract? (Burden on S to prove)
Here, the ROT clause has been incorporated into the contract.
3. Whether there is provision to allow S to enter premise to recover property?
Unless contract provides for this, court order maybe needed
Issue: Whether the ROT clauses are effective?
1. Retention Clause allows S to retain title over the goods sold until the price is paid
Of Title to the even though they have been delivered to the Buyer
original goods  Allowable under SOGO:
Clauses  S19 property passes when the parties intend it to pass.
 S21 S can reserve the right to the goods until conditions
are met, notwithstanding delivery of goods to B
Property never passed as it was the intention of parties
 ROT to the original goods clauses have been consistently upheld
by the courts as long as it is well-worded (Re Five Oceans Supply
Services Ltd) (Romulpa)

 E.g. NOT well-worded: Re Bond Worth - equitable & beneficial

ownership (legal title passed, E&B ownership came back – charge
invalid) (if other words were used – retain full title – would work)
2. All monies Seller retains title to the goods (even if they are paid-for) until B pays off
clause all he owes to S.
 B not creating a charge as he can only create a charge over his
own property and B never gets title to the goods - likely to be
held effective by the court - intention was to create security over
any unpaid $ - Does not give rise to a charge and is effective
without registration.
 Armour v Thyssen – steel strip for manufacturing. S was able to keep the
PR and resume ownership of goods despite the insolvency of B

 BUT NOTE: enforcement issue – Q of timing

 Seller cannot use the clause to make a windfall. Clough Mill v

Martin
Where S get back all original goods, he can only resell goods for monies
he was owed. If he received more than he was owed, he needs to return
extre proceeds to buyer
Wording of Bulbinder - esp. applicable to goods bought for sale rather than use in
the contract is business e.g. tools/equipment
decisive
RoT clause in K, provided that B can on sell these goods but if certain
event occur, S would be entitled to suspend B’s right to on sell the
goods – Administrator proceeded to sell the goods – S: Rights to sell the
goods cease when in the hands of admin

Not the auto suspension of the right to sell – simply gave S the right to
require the B not to sell
H: ROT did not give S priority over the stock that had already been sold,
but simply a right to recover value of stock that has not been sold.
Effect: Not an effective ROT Clause

An effective ROT clause should ensure goods are either not sold or you
can recover the proceeds from the sale of goods

Note: decided on case by case basis – construe not only particular clause
will be considered but also its relationship with the K as a whole
3. Proceeds whereby seller is entitled to trace proceeds of resale of goods which are
Of Sale Clause sold-on by buyer to a third party
BAILMENT?
B is (until title passes) in possession of goods as bailee of Seller
or
TRUST?
Issue: whether intention of party to create genuine trust arrangement
(Fiduciary relationship) (under which B resell as an agent for S and
account for all sale proceeds) or it is merely a security arrangement
(under which B resell for profit and account for enough sales to cover
debt owed to S) – normal debtor/creditor relationship, in which case void
for non-registration.

Requirements of genuine trust Wilson v Holt/ Romalpa:

1) contract expressly state B is trustee of proceeds for S - buyer
owes a fiduciary duty to the seller, and does not have a beneficial
interest in the proceeds
Hendy Lennox (property passed, whether the goods were
 appropriated to the contracts – sold on to B2 – K reserved until full
payment – legal title to the engines only – no fiduciary relationship or
proceeds kept for S separately)
Compaq Computer (title retained until paid for – if the proceeds
insufficient to cover the claim, can sue at the crt for the balance - no
fiduciary relationship – just normal debtor and creditor – charge –
void for non-reg)

2) seller should have full control over the way the funds are used i.e.
contract must restrict the withdrawal of proceeds or use of proceeds for
all purposes (other than to be remitted to seller) Andrabell(credit sale of
travel bags – credit extended for 45 days – B had 45 days to pay – nt a
trustee of the funds – the money was B’s – for whatever purpose – Q of
RoT – must be void for non-registration) (term: shall not passed to the
company until the co has paid the total purchase $ - not selling as agent
on S’s behalf – no need to segregate the proceeds – no fiduciary
relationship – just normal debtor and creditor – charge – void for non-
reg)

3) buyer has to keep proceeds in separate account – contract must

mandate segregation of funds

4) buyer has to hold ALL proceeds from resale for seller (c.f. where
buyer’s duty to account to Seller for proceeds of sub-sale is limited to
Buyer’s outstanding indebtedness to Seller)

Arbuthnot Factors Ltd. (S kept title in the goods up to the amt of the debt
– charge – not registered – void – proceeds of sale clause failed)

Romalpa F: B conceded to be bailee selling on S’s behalf, and that there

was fiduciary relationship b/n S and B, meaning B as fiduciary was under
a duty to account for sale proceeds to S as beneficiary (MOVE UP TO
#1BAILEE????)

NOTE: recent years, trend of courts concluding that “a proceeds of sale

clause was a charge and void for non-registration” was reversed.

Wilson v Holt Held: fiduciary relationship found (notwithstanding clause

that expressly negates fiduciary relationship). B made sub-sale as agent
for S. No property ever obtained by B. Thus property passed straight
from S to B2.
BUT Heavily criticised by Gullifer

[ TITLE: Notwithstanding delivery and the passing of risk in the products, title shall
not pass to Buyer until Seller has received payment in full for the products and all
other goods or services agreed to be sold by Seller to Buyer for which payment is
then due.
Until such time as title passes, Buyer shall hold the products as Seller’s fiduciary
 agent and shall keep them separate from Buyer’s other goods. Prior to title passing
Buyer shall be entitled to resell or use the products in the ordinary course of
business and shall account to the Seller for the proceeds of sale ... .”

The terms and conditions also included another clause which read as follows:
“RELATIONSHIP OF THE PARTIES: Nothing herein contained shall be deemed to
create an agency, joint venture, partnership or fiduciary relationship between the
parties hereto ...”]
or
AGENCY?
Alternatively, the contract can clearly appoint buyer as seller's agent, i.e.
selling on behalf of, and under a fiduciary duty to, the seller. As the
goods and proceeds would be deemed all along belong to seller, title has
never passed and seller could assert title in the event of buyer’s
insolvency.
NOTE: under this approach, original seller may attract potential liability
arising from on-selling B2.
Effective 1. Reserve S’s title to goods themselves until:
Proceeds of  Buyer has paid [for all goods]; or
sale clause  Goods are sold by Buyer
 Goods lose their identity in Buyer’s
manufacturing process. (cannot be reversed engineered –
good itself no longer exists – proceeds of sale of products
deemed to fail)
2. Expressly state one or more of the following:
 B is (until title passes) in possession
of goods as bailee of Seller
 B, in having possession of goods and
in selling them, is in a “fiduciary” relationship with Seller
 B in selling them, does so on
account of, and as agent for, the Seller.
3. DO NOT provide that Buyer’s duty to account to Seller for the
proceeds of sub-sales is limited to the Buyer’s outstanding indebtedness
to Seller.

Gives Seller a kind of property right over all proceeds of sub-sales of

unmixed goods (except those sub-sales made after title has already
passed to Buyer).

To make the clause commercially acceptable, the contract would also

need to contain provisions placing duty on Seller to account to Buyer for
amounts by which proceeds of sub-sales of unmixed goods exceed
amount of Buyer’s indebtedness to Seller.
(e.g. B passes everything to S ($100 proceeds including the $90 windfall
but S has to account back to B the $90 windfall)
4. New S retains title over any new product that B makes with S’s goods
Products ROT
Clause While in Borden, it is said that such a clause is valid and does not create a
 charge if wording is clear, case law has consistently invalidated that new
product clauses.

Rationale: At some stage during the manufacturing process, goods lose

their identity and title had passed to B in the new product. If buyer
attempts to create interest over the products in favour of seller, this is a
charge and will be void for non-registration (Re Peachdart) (Ian Chisholm
Textiles v Griffiths) (Modelboard Ltd. v Outer Box Ltd.)
Functional  If the objective of such a clause is to give S priority on liquidation,
approach: charge is created (even though the wordings of the clause says B
Clough Mill v never owned the new product and thus no charge is created)
Martin  (Substance/economic function (i.e. charge) triumphs over form
(quasi-security)).
 The charge will be void for non-registration
Unexpected When S puts a ROT clause in a contract it is only thinking about providing
Consequence security for payment and does not think of the following:
s Of a ROT 1. Even if the goods were supplied for B’s personal use, S may lose
Clause title under 27(2) SOGO if B resells as B is a buyer-in-possession.
2. Cannot sue B for the price (unless S51(2) applies) as property has
not passed Wilson v Holt
3. If the goods will be consumed before property is to pass (before
credit period passes) it is not a contract for the sale of goods and
SOGO cannot apply as property cannot pass in goods that do not
exist.
 Does not therefore meet the definition in S3(1):
“A contract for the sale of goods is a contract whereby the seller transfers
or agrees to transfer the property in the goods to the buyer…”
(PST Energy - fuel was consumed – property could not pass – not a K for
sale)

If ROT clause effective: S retains title, can recover his property

If ROT clause ineffective: property has passed to B  B can create security interest over
B’s goods  charge not registered – security interest is void against receiver/liquidator

Reform of the  Retention of title clauses are unfair on other creditors.

Law  Why should a seller of goods be protected and not supplier of
services?
 As the essence of the clause is to provide security for payment
such clauses should be registered
(see English CROWTHER COMMITTEE REPORT)
No likelihood of this occurring in HK.
Such clauses do not feature in the amendments made to registration in
the new Companies Ordinance (Cap 622).