The dangers of retention of title clauses
CATERPILLAR (WILSON) v HOLT (CA) [2013]
The Court of Appeal (CA) considered a retention of title clause which was used as part of an agreement to supply finished goods for immediate resale. The case showed that the use of such a clause can have a major drawback because it was said that the operation of the clause was inherently inconsistent with the nature of the trading relationship between the parties, a situation which has previously caused the Courts problems.
Retention of title clauses are contractual provisions which reserve ownership of goods to the seller until the price of the goods has been paid in full. They are commonly used to protect the interests of sellers who supply goods prior to payment being made. This gives the seller priority over secured and unsecured creditors of the buyer if the buyer fails to pay for the goods for any reason.
Facts:
- Caterpillar (C) supplied a number of generators to its exclusive distributor for Nigeria. As permitted by the Distributorship Agreement, the generators were sold on to another company before C’s invoices were paid.
- Under C’s Terms of Sale there was a retention of title clause which provided that ownership of the generators did not pass until C’s invoices had been paid in full. The terms of the retention of title clause stated:
“… 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 by Seller to Buyer for which payment is then due. Until such time as title passes, Buyer shall hold the products as Seller's fiduciary agent and shall keep them separate from Buyer's other goods. Prior to title passing Buyer shall be entitled to resell the products in the ordinary course of business and shall account to the Seller for the proceeds of sale. If the Buyer fails to comply with a demand from the Seller to return products to which title has not passed, Seller may forthwith enter any premises where the products are stored and repossess them."
- When C took Court action to recover the purchase price, the distributor asserted that because of the retention of title clause, C had no claim to the purchase price.
- Section 49 of the Sale of Goods Act 1979 states that a claim for the purchase price can only be brought where (1) title to goods has passed; or (2) where a specific obligation to pay on a specific date has not been met, irrespective of whether delivery has taken place.
Decision:
- The CA held that Section 49 was an exclusive statement of the basis upon which a claim for the contract price can be brought. A claim for the contract price is important (and distinct from a simple claim for damages) since in a claim for damages, the claimant has a duty to mitigate its loss and may have to deal with arguments concerning remoteness of damage, causation and evidence. These problems are avoided by bringing a claim for the contract price. In addition, English law has a well-established principle that it does not allow a claim for damages in respect of a simple failure to pay money.
- Therefore the Court found itself in the ‘somewhat unsatisfactory position’ of not allowing C to claim for the contract price or to claim damages. As the Court said, “that is just an inherent result of a retention of title clause and shows that it has dangers as well as benefits”. The Court wanted to try, if at all possible, to ensure that C was not left in the ironic position of having taken prudent steps to improve its position but actually having made its position worse. The judges therefore sought to suggest other grounds upon which a claim could be brought.
Points to Note:
- The inclusion of standard form retention of title clauses in circumstances where goods are supplied with the intent that they are to be immediately sold on needs to be carefully considered. Any clause should deal expressly and more appropriately with the reality of the situation and be adjusted accordingly.
- It may be that by limiting the drafting one can improve the seller’s position and retain the right to sue for the purchase price. The drafter may have to accept that when any re-sale occurs, the seller may have to be prepared to drop its claim to the goods themselves and instead focus on its rights to the proceeds of sale. Any such rights should be limited to the amount of the price and not be any broader (in this particular case the buyer was liable to account not just for the price but the whole of the proceeds of sale). It may be best to acknowledge that upon the re-sale, title (albeit only for an instant) passes to the buyer but then immediately passes to the subsequent buyer. The drafting should also perhaps acknowledge that when selling the goods on, the buyer does so in its own right and not as agent for the original owner.
- The retention of title clause would not ordinarily have caused any adverse issues for C because its contract terms expressly provided that the buyer was to pay the price within 30 days of the date of C’s invoice. That would have brought C’s claim within the second part of Section 49. However, subsequent variations to the payment timetable had complicated matters. C did not in the event rely upon Section 49(2).