The Gazette 1989

GAZETTE

JULY 1989

Reservation of Title

This essay was recently awarded the Professional Books (Butterworths)

Prize by the Law Society.

A natural consaquenca of tha growth in tha area of "Insolvency"

in the commercial world is that those who do business at a

commercial level seek to protect themselves as much as possible

from the potential insolvencies of those with whom they deal.

One way in which this protection can often be achieved is by what

is known as "Reservation of Title".

The aim of this essay is firstly to examine the development of and

raison d'etre behind Reservation of Title, secondly to point out the

shortcomings in the law governing this area and finally to explore

proposed reforms, their implications and repercussions.

From a supplier's point of view goods are paid for, e.g. "The goods

that which is owed to him is an

asset. However, until it is realised,

it is also a worry, for once owner-

ship of that which is supplied

passes, the supplier is to a greater

extent than he would probably

wish, at the mercy of the debtor's

bona fides, good sense and

solvency.

If the debtor were to become

insolvent the goods supplied would

be part of his assets. They would

be sold and the proceeds would be

divided amongst his creditors.

Meanwhile, the unpaid supplier

would merely rank

pari passu

with

the other ordinary creditors and

would obtain only a share of the

proceeds after preferential and

secured creditors had been paid in

full.

The Sale of Goods Act, 1893

together with a line of case-law

enable a supplier to insert into a

contract for the supply of goods on

credit what is k nown as a

reservation or retention of title

clause, the effect of which is to

delay the passing of title in those

goods until the supplier has been

paid, thus enhancing his prospects

of recovery. To put it another way,

the supplier still owns the goods in

the possession of the purchaser

and the purchaser holds those

goods as bailee for the supplier and

so acts under a fiduciary duty to

him.

In general terms there can be

said to be t wo kinds of reservation

of title clause.

The first kind reserves title to

goods supplied until those specific

sold by t he supplier to the

purchaser under this contract, shall

be and shall remain the property of

the supplier until the full purchase

price thereof has been paid to the

supplier".

The second kind reserves title to

the goods supplied until

all sums

due

by the purchaser to the supplier

have been discharged, e.g.

"Property in goods supplied here-

under will pass to the purchaser

when all goods, the subject of any

contract between the supplier and

the purchaser, have been paid for

in full."

An advantage of using this

second kind of clause is that if, for

whatever reason, a reservation of

title clause in Contract A were to be

omi t t ed or were to become

ineffective, then there should be no

reason why such a clause in Con-

tract B should not protect the

supplier in relation to goods supplied

under both Contracts, at least to the

extent of the value of the goods

supplied under Contract B.

For example, if £15,000 worth of

goods were supplied under

Contract A (which is without any

reservation of title clause) and

£20,000 worth of goods were

supplied under Contract B, (which

includes a reservation of title

clause) then irrespective of the

balance due under either contract,

until the full £35,000 is paid, title

to goods supplied under Contract

B remains with the supplier. In such

a case, the purchaser has a choice

of either paying the full £35,000 or

fighting a claim for any balance due

under Contract A

and

forfeiting

possession of the goods supplied

under Contract B together with any

deposit or payments made on

account of those goods.

As well as possessing this in

terrorem

capacity, 'all sums due'

clauses, by their very nature, can

help to create a relationship which

is more fiduciary in character than

that of a debtor to a creditor.

No longer are the parties dealing

with a series of simple debts arising

from contracts which may or may

not call their relationship a fiduciary

one. When reservations and debts

are inter-linked and dependant on

one another, the relationship

obtains a fiduciary character, which

is essential where possession,

t hough not title, has been

transferred.

The Fiduciary Relationship

Before a reservation of title

clause can be enforced the supplier

must establish that a fiduciary re-

lationship exists between supplier

and purchaser. Once this relation-

ship is found to exist and once it is

possible to identify and locate the

goods supplied or the property

representing those goods, the

Courts will allow the supplier to

trace his proprietary interest.

Aluminium Industrie Vaassen

B. V. -v- Rom a!pa

Aluminium

Limited

the Plaintiff Company had

supplied a consignment of foil to

the Defendant Company subject to

reservation of title.

When the Defendant Company

went into liquidation the suppliers

claimed to be entitled to trace into

the proceeds of sale of the foil

which the Defendant Company had

sold on to third parties. The

Defendant Company argued that

where any of the foil had been

bought by bona fide purchasers,

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