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1. This paper is intended to provide businessmen with a brief practical approach to retention of title and to help them to discuss the subject with their lawyers. It is not intended to replace specific professional advice. Retention of title has been the subject of lengthy decisions in the courts, and specialists have written sizeable books on it. Therefore, this article can do no more than provide an introduction and an outline.
2. Retention of title is largely about the distinction between possession and ownership. Speaking generally, possession may be described as custody or control, and ownership as legal title. In regard to the sale of goods, possession and ownership often occur together, but not necessarily. The basic law relating to the sale of goods states that when goods are the subject of a contract of sale, title shall pass from the seller to the buyer at the time specified in the contract, but that if the contract does not specify a time, title shall pass upon the delivery of the goods. No doubt, therefore, in the majority of cases, title passes upon delivery.
3. To achieve retention of title the contract will stipulate that although the goods are delivered into the custody or control of the buyer, title shall not pass to the buyer until some condition - usual payment - is fulfilled.
4. First, are the seller's terms, regarding retention of title, binding on the buyer? Yes, if the buyer accepts them. How does he accept? By saying so, or by, for example, having the terms communicated to him and then going ahead and entering into the contract. Ideally, perhaps, the terms will be agreed when the contract is entered into, having possibly been communicated beforehand. When is the contract entered into or the bargain struck? Usually the contract is entered into when the buyer orders the goods and the seller agrees to supply them.
5. If the parties are involved in a 'one-off' order, and the terms are conveyed only on the back of the invoice, they will apparently not have been communicated in time as the invoice is usually rendered after the bargain is struck - the bargain having been made earlier when the buyer placed the order and the supplier agreed to supply. However, if the buyer receives a number of such invoices in respect of a succession of separate order, it could be argued that, as regards the later deliveries, the terms had already been communicated before the bargains were made. Even if the buyer remained silent about the terms, it might be contended that, by continuing to place orders with the supplier, he had accepted his terms.
6. Obviously, the seller's object in all this is to attempt to protect himself against non-payment by his customer. Usually, therefore, it is only when payment is not forthcoming - because, perhaps, the customer is insolvent and has gone into liquidation or receivership - that the seller attempts to enforce his terms and finds out if they are effective.
7. The terms for retention of title vary, although of course the object is always to create, in effect, a security in respect of a debt owing by the buyer to the seller. As regards that security, the contract may attempt
8. As regards the debt which may be thus secured, this may be
9. The dividing lines between the categories of security mentioned in paragraph 7 are often blurred, and obviously this is a source of difficulty are often blurred, and obviously this is a source of difficulty. A contract to retain title merely to unprocessed goods in the hands of the buyer may be relatively simple to draft and to enforce. It is when suppliers incorporate the 'catch-all' clauses in their terms that complications often arise. Establishing title to goods which have been processed, and to proceeds of sale, produces complex legal arguments. However, it may be useful to comment upon the various categories of security as follows.
10. Goods supplied and still held in their original state by the buyer (7(a) above): provided of course of course that it is properly drafted, a basic clause simply to retain title to goods supplied to the buyer and remaining unprocessed can often be effective. If it is desired to retain title to goods not specifically paid for, it is essential to have some means of identifying those goods. Possibly, for example, each item sold will bear a serial number, these numbers being quoted on the seller's invoices. Sometimes a buyer will purchase identical goods from the manufacturer and also through a wholesaler. If the origin is not indicated on the goods, identification becomes difficult, and it may be impossible to establish title. Sometimes a seller's terms may require the buyer to store the goods separately from goods supplied by others. The mere stipulation of this requirement may be significant, even if the buyer is found not to have complied with it.
11. Goods supplied and sold on by the buyer in their original state to sub-buyers (7(b) above):- A judgement held that an article sold in this way could not be recovered when the retention clause did not prevent the buyer from reselling. Also, in this case, an argument that the buyer was merely a bailee (see paragraph 12) of the goods did not work. A bailee cannot normally sell. So, this was not a bailment, and the seller did not therefore have the remedy (which is normally available to a bailor) of tracing the goods.
12. Goods supplied and processed in some way or the whole of the 'new' goods (incorporating, possibly, other materials) (7(c) above):- When discussing the identification and recovery of goods, lawyers speak of 'tracing' and 'bailment.' Bailment, briefly, is the delivery of goods by one person (the bailor) to another (the bailee) on the understanding that after the purpose of the delivery has been fulfilled, the goods will be re-delivered to the bailor, or otherwise, according to his directions. In such circumstances, a mere bailee does not become the owner. A common example of bailment is a traveller (the bailor) leaving his suitcases at the left luggage office of a railway company (the bailee). If the circumstances of a contract of sale are sufficient to establish bailment - with the supplier as bailor and the buyer as bailee - then, the lawyers may say, the supplier has a right to trace and a right to recover the goods. Lawyers may argue that bailment arises when the goods are in fact not under a contract of sale, as such. A retention of title sale is a certain type of contract of sale. It is not a sale, but an agreement to sell. However, it is argued that this does not always necessarily set up a bailment.
13. So, much depends upon whether the goods are still identifiable, whether they are in their original form, and whether they are capable of being returned. A judgement referred to a buyer who bought engines so that he could incorporate them into generating sets. This incorporation did not alter the engines. They were still identifiable and could be unbolted and removed. In this particular case it was decided that both incorporated and unincorporated engines could be recovered.
14. If the goods are used by the buyer in a manufacturing process then, lawyers will say, bailment, if it existed, may cease when the manufacturing process takes place. An example is provided by another well-known case in which resin was supplied to be used in the manufacture of chipboard. It was not possible to contemplate that when it had been so used, the resin could conceivably be re delivered to the supplier. So there was no bailment.
15. Proceeds of sale of goods sold on in their original form (7(d) above):- Various legal considerations arise, such as tracing and agency. In cases containing the above basic circumstances, the court asked if the contract required the buyer to store the goods separately, the inference apparently being that it could assist the seller's position if such a requirement were stipulated. Another question is whether there is a bailment. A bailment can give the bailor a right of tracing and similarly the absence of a bailment may mean he has no such right.
16. There is also the question whether the buyer is acting as the agent of the seller when he (the buyer) sold the goods on. If he was so acting, this would go towards assisting the seller to recover the proceeds of sale.
17. In a further case a supplier argued that although he had transferred legal title to the buyer, he had retained an equitable ownership and could therefore trace and recover the goods under the law of trusts. This would mean that the buyer was a trustee and the seller the beneficiary. The buyer, however, was free to do what he liked with the goods, a power quite opposed to that of a trustee. So it was considered that no trust had been set up.
18. Proceeds of sale of manufactured goods (7(e) above):- From what has been said above it will be apparent that to establish title to such proceeds of sale is difficult — and in some cases, perhaps, impossible. If any bailment that there may have been, ceases when manufacture commences or when a sub-sale takes place, no tracing rights can be derived from that source.
19. From all this it seems that there are some conflicting concepts. If a buyer is the agent of the seller, that may assist the seller in recovering the goods and tracing any proceeds. However, the relationship of principal and agent might not fit the circumstances.
20. Sometimes it might appear that the buyer has created a charge in favour of the seller. If the supplier knows that the buyer will use the goods in a manufacturing process, and agrees to this, the buyer has been given some degree of ownership. It may be possible to interpret this as a transaction where the buyer has ownership and the seller retains only the bare legal title as security. If this is a correct interpretation, then it may be that the buyer has created a charge over the goods in which he has a form of ownership. If the buyer is a limited company, the charge must be registered with the Registrar of Companies, otherwise it will be void against the liquidator and any creditor of the buyer.
21. Similarly, a claim by the supplier upon the proceeds of sub-sales might be interpreted as a claim that the buyer had created a charge on his book debts in favour of the seller. Again, where the buyer is a limited company, such a charge would be void if not registered.
22. If a retention of title contract has to be examined by court, the latter will interpret it by reference to the intentions of the parties. It will deduce their intentions from what they did, and from the surrounding circumstances, and not simply from the printed terms. So, if, for example, a seller supplies resin which he knows and agrees the buyer will use up so that, physically, it virtually disappears and becomes unreturnable, the court is likely to say that there is no bailment, even though the small print appears to say there is.
23. Some suspect that a seller - and possibly his lawyers - impose complicated terms on a buyer in the belief that if the latter defaults, he will feel overborne by the terminology and concede everything. However, if the buyer's default is accompanied by his insolvency, the supplier will not be dealing with the buyer but with a liquidator. The latter will be an experienced professional who encounters retention of title problems all the time. He will examine the circumstances of each case.
24. What should a retention of title creditor do if his buyer goes into liquidation or receivership? He should contact the liquidator (or receiver) at the earliest possible moment by telephone, and should at the same time write to him, enclosing a copy of the contract terms, a statement of account, copy invoices if necessary, and any other relevant information and evidence, and should obtain an acknowledgement of receipt of all this. The creditor should ask if he may view the goods, even if the liquidator does not yet agree that they may be removed. The creditor should not, of course, be aggressive, commit trespass, or behave otherwise than in a peaceable and proper manner. He should not, however, go to the other extreme and do nothing, in the misplaced belief that his goods are automatically protected by his terms and that sooner or later the liquidator will notify him that the merchandise has been carefully stored and is now ready for collection. That might be ideal, but life is not like that. The creditor should actively review - every two or three days if necessary - the existence and whereabouts of his goods, maintaining clear but courteous contact with the liquidator or his representative.
25. A final point about insolvency practitioners. They are sometimes appointed to act as administrators of a company under an administration order made by the court. In appropriate circumstances it is possible for an administrator to obtain an order from the court authorising him to sell goods which are in the company's possession, but which are subject to retention of title. The administrator is obliged to pay the supplier the market value of the goods, even though he might have sold them below that figure.
(Please note that while every effort is made to ensure the accuracy of this paper, neither the publishers, not the author or his employers accept any responsibility to any person who acts, or refrains from acting, on the basis of anything contained in this paper. Readers are recommended to obtain specific professional advice in respect of each individual case.)
This paper was produced by The Credit Services Association. The Credit Services Association is the professional association for companies specialising in debt collection, credit reporting and ancilliary services.