Australia: Retention Of Title - "A Maze If Not A Minefield"

Last Updated: 6 February 2009

Introduction and Background

Romalpa clauses, so named after the decision in Aluminium Industrie Vaassen VB v Romalpa Aluminium Ltd1, and often referred to as retention of title clauses or ROT clauses, are increasingly common in contracts for the sale of goods. Such clauses are particularly beneficial to non-retail sellers such as manufacturers, distributors and wholesalers who sell goods as part of a chain of distribution.

The typical intended function of an ROT clause is to ensure that payment is received for goods sold to the buyer or to retain ownership of such goods until all monies owed by a buyer to the seller are paid. In doing so, an ROT clause draws, and seeks to maintain, the distinction between possession of goods and actual title to such goods. In the absence of a valid ROT clause, title to goods will typically transfer upon the formation of the contract or alternatively upon delivery.2

Sale of Goods Act

In New South Wales the Sale of Goods Act 1923, forms the basic foundation for ROT clauses. In particular, clauses 21, 22 and 24 are of importance. Clause 21 deals with the ascertainment of goods sold and reads:

21 Goods must be ascertained

Subject to section 25A, where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained.

Section 22, deals with the intention of the parties with respect to the time of transfer of title and reads:

22 Property passes when intended to pass

(1) Where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.

(2) For the purposes of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties, and the circumstances of the case.

Section 24 reads:

24 Reservation of right of disposal

(1) Where there is a contract for the sale of specific goods, or where goods are subsequently appropriated to the contract, the seller may by the terms of the contract or appropriation reserve the right of disposal of the goods until certain conditions are fulfilled. In such case, notwithstanding the delivery of the goods to the buyer or to a carrier or other bailee for the purpose of transmission to the buyer, the property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled.

Types of Retention of Title Clauses

The two types of retention of title clauses commonly used are described as being either a "Simple" or "All Monies" clause.

A Simple ROT Clause

A 'simple' ROT clause retains title in specific goods on behalf of the seller until such time as the seller has been paid for those goods. For example purposes only, a rudimentary example of a simple ROT clause is as follows:

"Title to the goods that are the subject of this invoice will not pass to the purchaser until payment in full for such goods has been received by the vendor."

As is evident from the example above, a simple ROT clause will protect and retain title only in those goods that are the specific subject of the particular ROT clause. Accordingly, only those goods that form part of the specific agreement that is covered by the ROT clause, whether by way of a single delivery or invoice, will be subject. In practice, this invariably leads to significant difficulties.

By its very nature, a simple ROT clause will serve only to retain title in the specific goods. As a result, a simple ROT clause will not prove effective if the specific goods subject to it cannot be identified from amongst all other goods that may be in the possession of the purchaser.3 Therefore, it is incumbent on the seller of such goods to ensure that the goods claimed to be subject to the simple ROT clause are readily identifiable. If the goods are not separately identifiable (whether by way of separate labelling, coding or storage location) and cannot be distinguished from other goods (including other goods sold by the vendor and already paid for), the ROT clause is unlikely to prove enforceable.

As a result of the requirement on suppliers to identify the goods supplied, most ROT clauses will include a provision requiring the purchaser to maintain the goods in a separate area thus allowing for easy identification. Note however the difficulty that arises where the same supplier provides identical goods at separate times pursuant to separate simple ROT clauses. Suppliers must rely upon the purchasers to give effect to the requirement and maintain separate even these two identical but distinct goods. Failing to do so can (and invariably does) lead to confusion in tracking the goods to the respective invoices under which they were provided, particularly where the goods are drawn upon in portions and used as such goods typically can be.

An 'All Monies' ROT Clause

An 'all monies' clause retains title in all goods supplied by the vendor to the purchaser, provided at any time, until the point at which all debts or other obligations owed by the purchaser to the vendor have been satisfied4. For example:

"Title to all goods supplied by the vendor is retained by the vendor until payment of the purchase price and all other amounts owing are received by the vendor."

The intended effect of an all monies clause is to expand the retention of title from the specific goods provided by any one invoice or delivery and instead retain title in all goods supplied until all outstanding amounts owing are paid. At the point at which vendor has been paid in full for all goods, title in all goods supplied to that point then passes to the purchaser. At the point at which a purchaser has made payment to the vendor in full, a vendor may thereafter only seek to retain title in goods that it can be demonstrated were supplied after that point and the vendor does not therefore have any recourse to the earlier supplied goods.

The expansion of an all monies clause from specific goods to all goods has the advantage of avoiding the necessity of identifying specific goods that have not been paid for as opposed to those that have. While a vendor must still be able to identify the goods that it has supplied, as opposed to those supplied by others, an all monies clause dispenses with the requirement that the vendor prove non payment in relation to specific goods.

A further advantage of an all monies clause is that it expands the pool of goods that may be repossessed in the event of default by the purchaser. Thus, on the assumption that the purchaser is indebted to the vendor, if the purchaser fails to pay for goods, the vendor is not restricted to exercising its remedies against only those specific goods but can instead seek to seize other goods supplied by it at an earlier point in time.

Retention of Title in the context of Insolvency

ROT clauses can protect an unpaid vendor of goods from the purchaser's insolvency by enabling the vendor to defeat the claims of secured and unsecured creditors who might otherwise take priority over the vendor's claim and seize goods the purchaser has not yet been paid for.5 Upon the insolvency of the purchaser of goods, ROT clauses can generally be used by vendors to prevent items sold from becoming available for:

  • distribution amongst unsecured creditors;
  • distribution to secured creditors under a fixed or floating charge/security; and
  • sale or other use by an administrator other than in the ordinary course of business.

In virtually all cases involving a ROT clause, goods have been delivered to the purchaser prior to payment having been made to the vendor. In such cases, and presuming the validity of the ROT clause, the vendor will remain the owner of the goods despite the fact that the buyer has possession. In many cases the purchaser may even be permitted by the terms of the contract and the ROT clause to on sell the goods prior to making payment to the vendor. In such cases, a third party purchaser who buys the goods will receive good title in the goods provided that the purchase has been made in good faith, for value and without notice of any restriction on the sale.

Where the buyer has become insolvent and a valid ROT clause exists, the insolvency practitioner should, upon demand by the owner in title, make the goods available for return, failing which he or she may be subject to a claim by the vendor for injunctive relief or for conversion of the goods. Section 442C of the Corporations Act 2001 addresses this issue and prevents an administrator from disposing of property that is in the possession of the insolvent company but which is owned by another party unless such disposal is made 'in the ordinary course of business', with the consent of the owner or with leave of the court.

In the case of Osborne Computer Corporation v Riddell6, it was concluded by the court that the 'ordinary course of business' meant that goods supplied subject to an ROT clause could be resold until such time as a demand for the return of the goods had been made by the owner in title. Conversely, any sale made after such a demand would not be deemed to be in the ordinary course of business and could result in an action against an insolvency practitioner.

In seeming response to the authority in Osborne, and by virtue of amendments to section 442C of the Corporations Act made in late 2007, (specifically the addition of subsection 8), a disposal of goods by an administrator, even if made after a demand for the return of those goods by the owner in title, may still be a disposal in the ordinary course of business. This amendment allows insolvency practitioners to rebut what is a virtual presumption that a disposal of goods was not in the ordinary course of business after a demand for the return of those goods had been made. The necessity of such an amendment arose by virtue of the practical reality faced by many practitioners where in many cases, goods claimed to be subject to a retention of title clause, were so commingled with other goods as to preclude separate identification or even separation. In such cases, conceivably the insolvency practitioner would be deemed to have acted in the ordinary course of business in receiving fair market value for such goods and thereafter securing the funds recovered in a separate account until the matter is resolved. Nevertheless, where possible it would be prudent of any insolvency practitioner to avoid the necessity of testing this provision.

Issues commonly affecting the validity of ROT Clauses

There are three primary issues that arise and can impact upon the validity of ROT clauses and whether they are effective in retaining title to goods.7

  1. Where the goods are commingled or incorporated with other goods so as to lose their identity;
  2. Where the goods are irretrievably affixed to other goods; and
  3. Where the goods become fixtures.

Commingling & Incorporation

As identified in preceding paragraphs, it is incumbent upon a vendor to be able to identify the goods that are subject to a retention of title. In the event that the goods subject to a retention of title clause become so commingled or incorporated with other goods so as to completely lose their separate identity and be incapable of being ascertained, the vendor's right to retain title in those goods will likely be lost.

In Re Borden (UK) Ltd v Scottish Timber Products and Anor,8 the court considered a retention of title claim made by a vendor of resin used in the manufacturing process for chipboard. The court concluded that at the point at which the resin was used in the manufacturing process, it ceased to be resin and thereby lost its separate identity together with any claim to separate title. No accommodation had been made in the vendor's ROT clause for any interest in the chipboard and therefore the vendor was restricted to recovery of the value of the resin and had no interest in the end product.9

According to the High Court of Australia in Associated Alloys Pty Ltd v ACN 001 4521 106 Pty Ltd10, the question of whether goods have maintained a separate identity is a question of fact and degree. The court stated:

"Whether the goods which have been used in some manufacturing process still exist in the goods produced by that process have gone out of existence on being incorporated in the derived product is a question of fact and degree."

The court stated that the circumstances of each case are determinative and the degree and extent of incorporation with other goods will instruct as to whether goods have lost their essential character. In Associated Alloys the court concluded that steel supplied for use in the manufacture of vessels had lost its essential character and was no longer capable of being separately ascertained.

The intention and knowledge of the vendor is also relevant factor in that a vendor's knowledge that the goods were intended for ultimate incorporation with other goods will have some impact on the question.11

Affixed Goods

Supplied goods which are subsequently 'irretrievably affixed' to other goods may also result in a loss of title. This doctrine arises from the ancient Roman law that additions to property by growth, increase or an affixation of things belonging to different persons will vest in the owner of that property12.

Notwithstanding the clarity of the principal involved, its application has led to extensive conflicting authorities and a distinct lack of precision in practice. The precise degree of annexation or affixation required before goods become 'so entwined' with other goods is far from clear. Various tests have been used by the courts, the most predominant of which is that of 'severability' or 'injurious removal'.13 This test queries whether there can be a separation of the original goods without destroying or seriously injuring the whole.14

In Rendell v Associated Finance Pty Ltd,15 the court considered whether spare parts which were added to the engine of an automobile could be considered to have remained subject to a retention of title clause. The court concluded that the accessories attached to a motor vehicle continued to belong to their original owner unless it could be shown that, as a matter of practicability they could not be identified or, if identified, they had been incorporated to such an extent that they could not be detached from the vehicle. The court applied the severability/injurious removal test and noted that the engine had been easily removed and that the parts to that engine could be removed without damage to either the part or the engine.16

It may generally be considered that the state of law stipulates that a reservation of title clause will allow a vendor to retain title to an unpaid for good in the possession of a purchaser provided that its removal would not be impractical or cause damage to the whole.17

Fixtures

The doctrine of fixtures stipulates that whatever is so affixed to the land becomes part of it. The test of whether a good has become a fixture depends both upon the degree and purpose of annexation.18 In essence, a good, including a good that is subject to a retention of title clause, may become a fixture if it has some substantial connection with the land or a building upon that land and has been so placed with the intention of it becoming so.19

In the event that a good supplied by a vendor does become a fixture of land, the vendor is precluded from seizing that fixture pursuant to a ROT clause.

Sale of Goods to Third Parties

Absent any specific restriction in a ROT clause, purchasers of goods are entitled to on-sell those goods to third parties. As previously stated in relation to insolvency, in the event of administration, a practitioner may on-sell goods provided that it is done in the ordinary course of business. In both such cases, a third party who purchases goods obtains good title in the goods provided that the purchase has been made in good faith, for value and without notice of any restriction on the sale.

Increasingly ROT clauses are being drafted in such a way as to anticipate and accommodate the sale of goods to third parties, as the original purchaser ordinarily pays the debt to the original supplier on the basis of such third party sales. In such circumstances, attempts to secure the proceeds of the third party sale are made by inserting wording to that effect in the ROT clause. An example of such wording is:

"The vendor and purchaser agree that the purchaser shall be entitled to sell the purchased goods to third parties on the agreement that any proceeds of such sales are held by the purchaser on trust in a separate account for the vendor until such time as the vendor has been paid for the goods in full."

Difficulties arise in practice with the enforcement of such clauses as typically businesses do not hold such funds in a separate trust account. Frequently, insolvency practitioners are appointed and promptly receive notification of such a provision from a supplier only to find that no such account exists and no funds are separately identifiable from other assets of the company. In such cases the supplier of goods may seek to trace the proceeds of such sales. Tracing - as it is referred to - allows suppliers to 'follow' the property subject to the ROT clause, even where that property has been transformed into cash or other goods. The courts have concluded that tracing as an equitable remedy is generally only available where a fiduciary relationship is found to exist between the vendor and purchaser.20 Failing such a relationship, the tracing remedy cannot be exercised.

As a result of the difficulties that arise by virtue of the reluctance to allow the equitable remedy of tracing, increasingly ROT clauses are expanding to include terms which expressly or impliedly make the purchaser of goods the agent of the vendor in any sales to third parties. Similarly, terms are also being incorporated to require the purchaser to store the vendors goods separately from other goods, including the proceeds of any sales of those goods. Nevertheless, a fiduciary relationship cannot be created merely by asserting and labelling it as such. There is a general antipathy towards such a relationship as it is deemed to be prone to abuse. The prevailing judicial view has traditionally been that once rights are created over assets into which goods might be transformed or mixed, a charge is normally created, thereby requiring registration.

According to the judicial authorities, a charge will be created in circumstances where the ROT clause in question does not purport to retain legal ownership in the goods but rather beneficial or equitable ownership. Similarly, a charge will likely be created in circumstances where the goods are incorporated into an end product and the supplier seeks to maintain title in the ultimate product until paid for the original goods. In each of these cases, a charge is likely to be deemed to be created. Such charges require registration and are unlikely to be enforceable against an insolvency practitioner by virtue of sections 266 and 267 of the Corporations Act.

In 2000, the High Court in the case of Associated Alloys made the most important recent statement on the law of retention of title. In that case the relevant ROT clause provided that if the goods (steel) were used in a manufacturing process (which was the clear and recognised intention), the purchaser was to hold the proceeds in trust for the vendor. The steel lost its separate identity when used in the fabrication of industrial equipment that was eventually on-sold. The ROT clause was found to amount to an agreement to constitute a trust of future acquired property and was therefore not deemed to be a charge which would otherwise have been void for lack of registration. Although the supplier lost the case on other grounds, the High Court concluded that the ROT clause would have been effective in creating a trust in favour of the supplier in respect of any proceeds, being any money actually received by virtue of the sale of goods in which the steel had been used. The court noted that the loss of identity of the steel and the resulting loss of title by the supplier to that steel did not dispense with the requirement that the proceeds be held on trust.

It is evident from the decision of the High Court in Associated Alloys that the intention to create a trust must be clear and that all of the relevant circumstances must be assessed to determine whether or not such an intention exists. Nevertheless, it is still incumbent upon a party relying upon such a trust argument to identify the proceeds that emanate from the original goods supplied.

Conclusion

The law in relation to retention of title clauses is notoriously complex. While the legal concepts at work are not overwhelming, it is the practical application of the regime to real world factual circumstances which leads invariably to complexity. The subtleties and nuances of application lead to difficulties. Insolvency practitioners are well advised to require that any party claiming an entitlement to goods or proceeds pursuant to a ROT clause, undertake the effort to prove the validity of that clause and identify the precise goods subject to it. If this can be readily accomplished by a supplier, any further questions arising are likely best addressed by legal advice or alternatively by application to the court for direction. Failing to do so could result in potential liability to the practitioner.

Footnotes

1. Aluminium Industrie Vaassen VB v Romalpa Aluminium Ltd [1976] All ER 552 (CA).

2. Sale of Goods Act 1923, s.22, s.23 and s.24.

3. Collier, B.,Romalpa Clauses: Reservation of Title in Sale of Goods Transactions, The Law Book Company Limited, 1989, at p.65.

4. Armour v Thysse Edlestahiwerk [1991] 2 AC 339 and Puma Australia Ltd v Sportsman Australia Ltd (unreported SC of Qld, 28 August 1991)

5. Sale of Goods Act 1923, s.24.

6. Osborne Computer Corporation v Riddell (1995) 13 ACLC 1210.

7. Collier, B., Romalpa Clauses: Reservation of Title in Sale of Goods Transactions, The Law Book Company Limited, 1989, at p.65; Re Borden (UK) Ltd v Scottish Timber Products and Anor [1979] 3 All ER 961; Rendell v Associated Finance Pty Ltd [1957] VR 604.

8. Re Borden (UK) Ltd v Scottish Timber Products and Anor [1979] 3 All ER 961

9. Ibid.

10. Associated Alloys Pty Ltd v ACN 001 4521 106 Pty Ltd [2000] HCA 25.

11. See, for example Re Peachdart Ltd [1984] 1 Ch 131

12. Collier, B., Romalpa Clauses: Reservation of Title in Sale of Goods Transactions, The Law Book Company Limited, 1989, at p.69.

13. Ibid.

14. Lewis v Andrews and Rowley Pty Ltd (1957) 73 W.N. (NSW) 670 at 672; Rendell v Associated Finance Pty Ltd [1957] VR 604; Hendy Lennox (Industrial Engines Ltd) v Grahame Puttick Ltd [1984] 2 All ER 152.

15. Rendell v Associated Finance Pty Ltd [1957] VR 604

16. Also note the similar decision made in Hendy Lennox (Industrial Engines Ltd) v Grahame Puttick Ltd [1984] 2 All ER 152 in relation to diesel engines.

17. Collier, B., Romalpa Clauses: Reservation of Title in Sale of Goods Transactions, The Law Book Company Limited, 1989, at p.72.

18. Megarry, R. and Wade, HWR., The Law of Real Property (5th ed., Stevens, London, 1984), p.732.

19. Collier, B., Romalpa Clauses: Reservation of Title in Sale of Goods Transactions, The Law Book Company Limited, 1989, at p.73.

20. Hallett's Estate; Knatchbull v Hallett [1880] 13 Ch D 696, Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd [1984] 1 WLR 485

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