Retention of title clauses – how effective is yours?
ISHER FASHIONS UK v JET STAR RETAIL [2010]
This case suggested that a retention of title clause (often known as a ‘ROT’ clause) may not be effective if its operation is inconsistent with the overall trading relationship between the parties, such as where it appears in a contract for the supply of finished goods intended for immediate resale.
There are two basic types of ROT clauses:
- one which simply retains title for the supplier in particular goods supplied until those specific goods have been paid for; and
- one which retains title to all goods which have been supplied until all monies owed to the supplier have been discharged (a so-called ‘all monies’ ROT clause).
facts:
- Bulbinder Singh Sandhu (trading as Isher Fashions UK) had the benefit of an ‘all monies’ clause. The contract also provided that if J entered into administration, I could terminate or suspend the contract without liability and all monies owed would become immediately payable.
- I supplied quantities of clothing to J over a period of time. However, J then went into administration. I demanded payment in full but did not terminate the contract or ask the administrator to identify or deliver up any items of stock. At that stage I made no attempt to rely upon the ROT clause.
decision:
- The Court held that it had to apply the ROT clause in the context of the contract as a whole. It decided that it was implicit that J was entitled to sell the goods to third parties in its usual course of business and to pass title without having paid I in full. The court therefore refused to give effect to the ROT clause.
- Accordingly, the Court found that the administrator was perfectly entitled to sell the goods in question and, rather than having to account for the net proceeds of sale direct to I, the administrator was entitled to divide the proceeds between all the creditors.
points to note:
- The position may well have been different if, before the administrator had sold the goods in question, I had sought to rely on its ROT clause and had asked the administrator to deliver up or identify the goods covered by the clause.
- In terms of drafting, any clause should reserve both legal and equitable title to the goods.
- Consider whether the drafting of any clause should refer only to goods which have not yet been sold by the customer, since such a clause is then entirely consistent with the right of the customer to sell goods in the ordinary course of business.
- Make it clear that any right to sell on goods in the ordinary course of business only subsists for so long as the company is solvent and certainly does not apply to sales by an administrator or liquidator. The court was not prepared to imply such a constraint in this case.
- There must be an express right to enter premises to repossess the goods.
- There should be an obligation on the customer to store the seller’s goods separately and identify them in some way as belonging to the seller. In practice, this latter obligation is more likely to be just an obligation not to interfere with ownership markings which have been placed on the packaging.
- There is, in any event, some debate about whether an ‘all monies’ clause creates a charge which must be registered at Companies House under the Companies Act in order to be enforceable. To circumvent this concern, it is a wise precaution to include a basic ROT clause alongside an ‘all monies’ clause in a separate sub-clause of the contract, so that the former will remain unaffected even if the latter gets struck out.
- There is a potential danger that by including any provision which seeks to secure an interest in the proceeds of sale, it could be interpreted that your customer is actually onward selling goods as your agent thus making you primarily liable for any damage or loss to the ultimate customer. This risk should perhaps be borne in mind particularly since in the event of insolvency you might be an attractive target.
- Contracts should perhaps provide expressly for an automatic obligation on the administrator or liquidator upon administration or insolvency to immediately identify any remaining stock belonging to the supplier and to deliver up possession.