RETENTION OF TITLE CLAUSE

In a contract of sale of goods, property in goods is transferred to the buyer at such time as the parties intend it to pass. Retention of title clause provides that the supplier or seller of goods retains the title to the goods until payment has been made by the purchaser. These clauses are incorporated into contracts to ensure that the seller does not suffer loss should the purchaser become insolvent.

They are important in securing the interest of the parties to the contract. In the case of Aluminium Industries Vaasen BV versus Romalpa Aluminium Ltd (1976) 1 WLR 676, the Plaintiff was a supplier of aluminium foil. The Defendant processed the aluminium foil in their factory. In their contract of sale they had a retention clause stating that the title would only pass when the Defendant paid the full purchase price. Before the price was fully paid, every product manufactured by the defendant from the aluminum foil would be held and sold by the Defendant as agent of the Plaintiff and therefore any sale proceeds would be held in trust as bailee to the Plaintiff. When the Defendant went into liquidation the court held that the retention of title clause was effective and the plaintiff could trace the proceeds of sale ahead of the Defendant’s secured and unsecured creditors.

The effect of a retention clause will depend on its wording. When claiming under a retention of title clause, the claim of the seller will only succeed if the clause extends to cover the goods or money being claimed. When a retention clause states that the seller holds title to the goods until payment has been made, the effect of this is that in case of liquidation the seller may reclaim the goods. However if these goods have been manufactured into a new product or have began the manufacturing process, the claim will fail, unless the wording of the clause extended to the new product.

Retention of title clause does not reach the goods if they have changed their identity. To enforce a retention of title clause the goods must be identifiable and should therefore not have lost their identity. Identification may be through serial numbers, identification marks or other way that the goods may be identified as those that were supplied by the seller. If the clause intends to extend to new products processed from the supplied goods, there should be a registered charge over the new product.

In Borden Limited versus Scottish Timber Products Limited (1979) All ER 961, the goods supplied had lost their identity through manufacturing, the court held that the supplier would not claim ownership over the new product.  Similarly, in Re Peachdart Limited (1983) 3All ER 204, leather supplied had been used to make handbags; the court held that the seller could not claim against the handbags as the leather supplied had already lost identity through the manufacturing process.

Identity of the goods is very important when enforcing a retention of title clause. In the case of Hendy Lennox Industrial Engines Limited versus Grahame Puttick Limited (1984)2All ER 152, the seller had supplied an engine which had been incorporated into a generator, the court held that the identity of the engine had not been lost through the incorporation and could therefore be reclaimed by the seller.

Retention of title clause may provide that where the goods supplied are used to manufacture a new product, the seller and buyer will hold the new product as tenants in commom. In that case, it will be easy for the supplier to reclaim the goods supplied by him in case the buyer goes into liquidation. This will however depend on identification. If the goods he supplied cannot be identified when mixed with the other products used in the manufacturing process, then, his claim will fail.

A good supplied may loose its identity through affixation to land. This depends on whether the good is still a chattel or has already become a fixture. A chattel is any movable item that is capable of delivery. When affixed to land, the chattel will becomes a fixture. As was held in the case of Botham versus TSB Bank plc (1996) EG 149 whether a chattel has become a fixture will depend on;

·         The degree of annexation

·         The purpose of annexation, and

·         the permanence

If the item supplied has already become a fixture, the seller’s claim under retention of title cannot succeed. This is because at that point the item is deemed to have lost identity and become part of the land.

In determining whether a claim over goods by a seller is valid, an official receiver will consider;

1.      The wording of the clause. Where it seeks to retain title until payment has been made, the validity of the claim will depend on whether the goods are still identifiable. Where it extends to the goods to be manufactured out of the supplied goods, the validity of the claim will depend on whether there was a registered charge over the new goods. Where it states that the new goods will be held by the seller and buyer as tenants in common, the validity of the claim will depend on whether the goods supplied can be identified out of the new product.

2.      Incorporation of the clause in the contract. It is not enough for the seller to allege that that was the agreement between him and the buyer. It must be expressly stated in the contract. The terms of the contract must be clear to show the intention of the parties.

3.      Identification. Retention of title to goods supplied largely depends on whether those goods can be identified. The official receiver should allow the seller to enter into the place where the goods are stored for identification. Identification may be done using serial numbers on the goods or other identification mark expressed in the invoice.