A retention of title clause is a provision in a sale of goods contract that delays the transfer of title to, or property in, the goods from the seller to the buyer until certain conditions are met (usually, at the minimum, the payment of the price of the goods).
The purpose of such a clause is to provide a security interest in the goods that the seller can thereafter use to recover them if the buyer becomes insolvent or bankrupt.
This allows the seller to recover or reclaim the goods if the buyer fails for any reason to pay the purchase price of the goods as the goods remain the seller's property and have not become the buyer's property.
10.1 Types of retention of title clauses
- Simple clause: the seller retains ownership of the goods until the buyer pays the full price for the goods sold under the particular contract.
- All moneys (or current account) clause: the buyer is required to pay the seller all amounts outstanding under all sale of goods contracts between the seller and the buyer.
- Extended clause: the seller reserves ownership of the goods against the buyer and sub-buyer or disponee of any interest in the goods.
- Prolonged clause: this clause uses the three previous four stages and also claims property, or an interest, in any manufactured or processed goods of which the goods supplied by the seller to the buyer have become part during the course of manufacturing or reworking.
10.2 Key aspects of retention of title clauses
- The seller must ensure that the retention of title clause is a part of the contract of sale. It is not enough for the retention of title clause to be contained in, or impressed upon, an invoice or some other post-contractual document such as a packing slip or dispatch notice.
- If goods are still in the possession of the buyer and have not been resold or physically incorporated into other goods or amended in such a way as to prevent them being identifiable, the retention of title clause will take effect.
- The retention of title clause must retain title to the goods, not confer title on the buyer and seek to obtain title or an interest in the goods by means of a charge-back mechanism.
- The retention of title clause must adequately identify the goods. The seller should name the goods specifically in the contract of sale and place suitable identification symbols and marks on the goods to indicate that the goods are the property of the seller.
- The retention of title clause should constitute the buyer a bailee of the goods. As a bailee, the buyer will have the legal and economic risks of the goods but will not have ownership of them. A bailment is sufficient to displace the usual rule in sale of goods law that risk prima facie passes to the buyer with the transfer of the property of the goods, and so it remains with the seller until the property passes to the buyer.
- No retention of title clause should be included in a contract without carefully considering its suitability for the transaction at hand.
- The retention of title clause must deal with the prospect that the buyer may re-sell the goods in the course of its business. The usual step that the seller takes is to transfer its interest away from the goods to the sub-sale proceeds.
- Many retention of title clauses impose conditions which provide the seller with the right to enter onto the buyer's property and recover the goods if the buyer defaults. In the case of cross-border sales the seller and buyer are physically separated. Therefore, speaking practically, if the seller inserts such a provision in the contract the seller must have the right to enforce its rights of recovery and of pursuit by using an agent.
10.3 Extract of retention of title clause
Title to Products delivered by the Supplier to the Buyer does not pass until payment in full has been made except when the Buyer resells the goods in the ordinary course of business. In that case, title will pass to the Buyer immediately prior to the resale.
11. Force majeure
Force Majeure is a term in a contract.
It permits a party to the contract to be released from its obligation to perform the contract, sometimes permanently, sometimes only for the duration of the force majeure event, if an agreed event beyond that party's control (the force majeure event) occurs.
Frustration occurs when, without fault of either party, performance of the contract has radically changed.
Performance must be impossible as distinct from impractical.
The test is "whether the situation resulting from
the [relevant event] is fundamentally different from the
situation contemplated by the contract."
Frustration brings the contract to an end.
It discharges the parties from their obligation to perform their contractual duties.
Right, remedies and liabilities which have arisen before frustration remain.
Being a contractual clause the parties determine how force majeure will affect the contract.
Conceptually a force majeure event is one which:
- Is beyond of the control of the party relying on the force majeure clause; and;
- Could not have been prevented by the party relying on the clause taking reasonable steps to prevent the event from occurring.
11.1 Short form force majeure clause
If by reason of any fact, circumstance, matter or thing beyond the reasonable control of the seller or the buyer either is unable to perform in whole or in part any obligation under this agreement that party is relieved of that obligation under this agreement to the extent and for the period that it is so unable to perform and is not liable to the other party to this agreement in respect of such inability.
11.2 Long form force majeure clause
Where a party is unable, wholly or in part, by reason of an act of God, strike, lockout or other interference with work, war declared or undeclared, blockade, disturbance, lightning, fire, earthquake, storm, flood, explosion, governmental or quasi-governmental restraint, ex-appropriation prohibition, intervention direct or embargo, unavailability or delay in availability of equipment or transport, inability or delay in obtaining governmental or quasi-governmental approvals consents permits licences authorities or allocations, and any other cause whether of the kind specifically enumerated above or otherwise which is not reasonably within the control of the party affected ("force majeure"), to carry out any obligation under this agreement and that party:
- gives the other party prompt notice of that force majeure with reasonably full particulars thereof, and, insofar as known, the probable extent to which it will be unable to perform or be delayed in performing that obligation; and
- uses all possible diligence to remove that force majeure as quickly as possible;
- that obligation is suspended so far as it is affected by force majeure during the continuance thereof provided that;
- an obligation to pay money is never excused by force majeure;
- the requirement that any force majeure shall be removed with all possible diligence shall not require the settlement of strikes, lockouts or other labour disputes, or claims or demands by any government on terms contrary to the wishes of the party affected.
Drafting calls upon all the skills of lawyers. Good lawyers are those who readily understand their clients, are quick to appreciate the facts in which documents are to operate, are responsive to changes particularly those relating to business and social conditions, and have a better than average command of the law yet accept the need to draft documents in a simple language. They are careful. They do not use a form of words unless they have considered its purpose and how it achieves it. They have a wide experience of law and life; that experience cannot be acquired overnight. Lawyers who seek to be good draftsmen must draft, must write provisions. They cannot do this unless they have an adequate understanding of the principles governing the construction of provisions. Thus they must understand the nature of the language of the law and the nature of generality of expression. Without understanding these elements, they will be found to rely on the forms in the officer and precedent books rather than on principles.
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- Butterworths Australian Legal Dictionary. 1997. Sydney: Butterworths.
- Dal Pont, GE. 2003. Law of Costs. Sydney: LexisNexis Butterworths.
- Robinson, S. 1973. Drafting: Its Application to Conveyancing And Commercial Documents. Sydney: Butterworths.
- Thomson J, Warnick L, and Juris K. 2008. Commercial Contracts Clauses: Principles and Interpretation. Australia : Lawbook Co
- Arbitration Clause. Encyclopaedic Australian Legal Dictionary, 16 February 2009.
- Restraint. Australian Encyclopaedia of Forms & Precedents, 16 February 2009
- Retention of Title Clauses. Australian Encyclopaedia of Forms & Precedents, 16 February 2009.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.