228 / 482
GAZETTE
JULY 1989
the relationship between itself and
the suppliers ceased to be that of
bailor-bailee. Instead it claimed that
the new relationship was one of
creditor-debtor, the point being that
if this were the case, the fiduciary
relationship between the parties
would be negatived and there could
be no tracing remedy.
The Court of Appeal held that
until the foil was paid for it
remained the property of the
supplier. Thus the Defendant
Company was entitled to re-sell the
foil on behalf of the supplier only.
This it was bound to do to the
extent to which money was still
owed. The Defendant Company
was consequently liable to account
in a fiduciary capacity to the
supplier for the proceeds of such
sales.
As a result of the stance adopted
by the Courts in cases such as this,
the position between supplier and
purchaser would seem ideally
balanced. The contract which con-
tains a reservation of title clause
would seem to successfully repre-
sent the intended relationship
between the parties and to protect
all relevant rights at contract stage.
Because it is the function of the
Courts to decide what was the
intention of the parties at contract
stage, the question can sometimes
arise as to whether adequate
notice of the reservation has been
brought to the attention of the
purchaser.
This question arose in
Sugar
Distributors Limited -v- Monaghan
Cash and Carry Limited*
where
the parties had been doing busi-
ness together for over two years
Reservation of Title became the
basis on which the Defendant was
supplied. Carroll J. held that there
was no special duty on the Plaintiff
to draw the Defendant's attention
specifically to the clause and that
because the parties had been
trading together on this basis for
the fifteen months prior to the
dispute, the Plaintiff, by putting the
terms on which the goods were
supplied on the face of the invoices,
gave reasonable notice of the con-
ditions applicable, so as to make
them valid and binding on the
Defendant.
In deciding that there was no
special duty to bring the clause to
the purchaser's notice, Carroll J.
was following the principle that a
person who signs a document con-
taining contractual terms will
normally be bound by them even
though he may have read them and
even though he may be ignorant of
their precise legal effect.
Problems Arise
With regard to Reservation of Title
however, there is more to consider
than the supply contract, the
reason being that there are usually
parties other than the supplier and
purchaser involved and conse-
quently there are more rights which
deserve the-protection of law.
If the only parties affected by a
reservation of title clause were the
supplier and purchaser, the Courts
would no doubt respect and protect
the parties' freedom to contract.
But this is very rarely the case.
There are usually third parties,
existing and prospective creditors
for example, who have an interest
in knowing exactly what it is the
purchaser owns, how much the
purchaser is worth and by corollary
what it is that the purchaser
doesn't own. Because these third
parties tend to rely on this
information in their dealings with
the purchaser, they too have rights
which deserve the protection of
law.
For example, A has supplied plant
and machinery on credit to B with
a reservation of t i t le clause
included in the supply contract. C
is considering whether or not to
give or to extend credit to B. When
C notices B's apparent ownership
and apparent ability to pay for a
spanking new plant and machinery,
C will almost certainly be more
disposed towards giving credit to B
in the mistaken belief that B owns
the plant and machinery. C should
therefore be put on notice of what
B in fact owns.
The general purpose of Section
99 of the Companies Act, 1963 is
to make third parties such as actual
and prospective creditors aware of
the existence of charges over a
debtor company's assets. This it
does by requiring certain types of
charges to be registered.
But does a reservation of title
clause create a charge over the
property reserved and if so at what
stage and in which kinds of case is
the supplier's proprietary interest
converted into a compulsorily
registerable charge?
On the one hand there is the
argument that the supplier's rights
of reservation amount to charges
over the purchaser company, the
purpose of which are to secure
payment of the unpaid purchase
price. Accordingly if these charges
have not been registered they are
void under Section 99 of the
Companies Act, 1963.
At the same time there is the
claim that since the provisions of
the reservation of title clause
prevent the buyer from ever
enjoying any proprietary interest in
that material until it has been paid
for in full, the purchaser cannot
create a charge over property in
which he has no proprietary
interest.
Having listened to these conflict-
ing arguments which represent the
opposite extremes in the debate,
the Courts have had the unenviable
task of having to balance the
respective rights of the parties, a
balance which, in the absence of
statutory guidelines, inevitably
depends more on the facts of each
case than on the strict rule of law.
The Courts' Interpretation
In
Borden (U.K.) Limited -v-
Scottish Timber Products Limited*
the Purchaser was supplied with
resin to be used in the manufacture
of chipboard, during which the
resin became an inseparable con-
tituent of the end-product. The
Purchaser went into liquidation by
which time all of the resin supplied
had been used in the manufactur-
ng process. The Supplier relied on
the reservation of title clause which
reserved title in respect of the resin
only and not in respect of any form
into which that resin might be
converted. The Supplier claimed to
be entitled to trace both into the
chipboard and into the proceeds of
sale of that chipboard to third
parties.
The Court held that the resin
which was the subject of the
reservation of title clause had
e f f ec t i ve ly been consumed.
Because there was nothing in the
Contract effective to create any
interest in or charge over the newly
manufactured chipboard or the
proceeds of its sale the clause
became redundant. In any case,
had the reservation of title clause
created such an interest or charge,
such interest or charge would have
been void for want of registration.
The consequence of the
Borden
Case therefore is that a retention of
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