UK: Reservation Of Title Clause May Create Payment Problems

Last Updated: 26 November 2013
Article by Mark Alsop

Wilson manufactured and sold generator sets and spare parts worldwide. Its customers included Holt which re-sold the goods to its subsidiary in Nigeria. Wilson's standard terms applied to the sales. They included the following "no set-off", retention of title and no-agency clauses (with italics showing relevant phrases considered by the court):-

  • Buyer shall not apply any set-off to the price of Seller's products......
  • Notwithstanding delivery ... 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 ... Until such time as title passes the Buyer shall hold the products as Seller's fiduciary agent ... Prior to title passing the Buyer shall be entitled to re-sell or use the products in the ordinary course of business and shall account to the Seller for the proceeds of sale ...
  • Nothing herein shall be deemed to create an agency,... or fiduciary relationship between the parties.

Holt was permitted extended credit. When it failed to pay invoices, a repayment plan was agreed. Holt failed to meet the repayment terms with the result that Wilson brought proceedings for the price of the goods, claiming US $12.6m. Holt sought to counter claim more than US $53m for breach of Holt's exclusive distributor rights in Nigeria.

The High Court gave judgment for Wilson. The key points for decision by the Court of Appeal were:-

  • whether property had passed to Holt when it on-sold the goods. This was relevant in relation to the next point about Section 49 of the SGA.
  • whether an action under Section 49 is the only way a seller can bring an action for the price, or whether the Section is permissive only. The Section provides that where property in goods has passed to the buyer, the seller may maintain an action against him for the price of the goods. (It also provides that an action may be maintained where a price is payable on a specified date). If a Section 49 is the only time an action can be brought, no action can be bought if property has not passed.
  • whether the set-off clause applied to prevent Holt from raising its counterclaim. Holt argued that the set-off only applied to legal set-off and not to transactional or equitable set-off.

The Court of Appeal held as follows:-

1. Retention of title. Here the judges diverged. They agreed that it all depended on the wording of the particular clause, but disagreed over the effect of the wording.

Lord Justices Patten and Floyd interpreted the words "Until such time as title passes, the buyer shall hold the product as seller's fiduciary agent" literally; title remained with the seller up until the time of sub-sale and then passed directly from the seller to the buyer's customer. That fiduciary agent interpretation was reinforced by the words stating that the whole proceeds of sale (and not just the sums due to Wilson) were to be paid to the seller.

As for the no-agency clause, the judges considered that clause was intended to limit the trading relationship to an ordinary contractual relationship and not to negative the express imposition of an agency under the retention of title clause.

Holt had also raised the argument that if the sale was to be as an agent, that would expose Wilson to liability under contracts with sub-purchasers, with price and other contractual terms being beyond Wilson's control. This argument was dismissed on the basis that it was precisely what was considered in the Romalpa case.

Lord Justice Longmore thought otherwise. He agreed with the High Court judge that the Romalpa case was distinguishable as being in different terms. He thought it would be remarkable if Wilson were liable under agency principles to the subpurchaser on contracts whose terms were beyond its knowledge and control. It would also have meant that, because payment was not due until after the sub-sale was made, all sales between Wilson and Holt would effectively have been as principal and agent, and that cannot have been the intention. He therefore held that title passed to Holt immediately before any on-sale. He also thought that the ROT clause was intended to operate as security for payment of the price, not to confer a windfall, and may have created a registerable charge.

2. Whether Section 49 is mandatory or permissive. All the judges were agreed that Section 49 was mandatory, i.e. an unpaid seller can only sue for the price if property has passed (or if there is a specific date and payment was not made on that date). As the judges admitted, this gave rise to considerable problems in relation to retention of title clauses, namely how does a seller sue for the price if property never passes to the buyer, yet the buyer has on-sold the goods? Lord Justice Patten thought that Wilson could claim as a fiduciary agent. Lord Justice Longmore thought that there might be a potential claim for damages for nonacceptance, but that did not resolve the claim if there were no realistic claim under that head. It was "ironical" if damages had to be recovered for supposed nonacceptance when the goods had not only been accepted but disposed of for good consideration to third parties. The only alternative was to suppose that there might be a claim for damages for failure to pay the price, but English law does not normally allow a claim for damages or failure to pay money. There was also the logical difficulty in saying that Holt was in breach of contract for failing to pay the price, if the price itself was not due because property and the goods had never passed to Holt. He concluded "I therefore find myself in the somewhat unsatisfactory position of concluding that, if property never passed to [Holt], [Wilson] have no claim for the price nor even a claim for damages. That is just an inherent result of a retention of title clause and shows that it has dangers as well as benefits."

3. The no set-off clause. All the judges agreed that "any set-off" in the set-off clause meant "any set-off" and that there was no reason to think that it applied to legal set-off, but not to transactional or equitable set-off.

Comment. One might have thought that fundamental issues relating to retention of title clauses had been ironed out over the decades, this case shows that this is not so.

The main lesson is not to try to achieve too much in a retention of title clause. It should be fine for the goods to be held by the buyer as agent, but when the buyer comes to resell the goods, the best course will be to provide that title passes from the seller to the buyer immediately before the goods are re-sold. This will then enable the seller to maintain an action for the price. Of course, if the buyer is retaining the goods for use in its own business, then a straightforward retention of title clause should work.

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.

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