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GAZETTE
MARCH 1978
Sale and Retain — A Worm's-eye View
By FERGUS
We are by now all familiar with the dreaded phrase
"Retention of Title". We are not by any means all clear
about what the phrase means. This is not surprising as the
clause, like the weather, is ever-changing; like the dread
sea reflecting the subtle nuances of the sky, so the fickle
clause responds to hapless circumstance.
There are many different types of these clauses, which
most people, erroneously, appear to accept as "Retention
of Title Clauses" and call them such. This has served in
no small way to cloud the issues. An examination of some
of these clauses reveals that they differ enormously both
in wording and legal effect.
One may, broadly speaking, put such clauses into two
large categories:
1. Those clauses which are effective immediately upon
the sale of goods; and
2. Those which have a "springing" effect in that they
only operate upon the insolvency of the buyer of the
goods.
This appears to be a fundamental distinction because
the implications are that the property passes upon the sale
in the second category; this is important for reasons we
shall see later.
Both these large categories may be sub-divided into
almost as many types as the English language and the law
of contract will allow. One can, however, discern several
species.
As for the first category. These are indeed the true
blooded retention clauses. Most, indeed, retain title (that
is to say legal ownership). Some of these retain beneficial
and equitable ownership also; others do not. Others do
neither, but retain beneficial or equitable ownership only.
As for the second category. These are not really
retention clauses at all in die strict sense because the
clause does not prevent title or beneficial ownership
passing. They are, however, retention clauses insofar as
they universally seek to claw back or "retain" from the
buyer something which normally could not be retrieved.
Such intentions are always directed to the proceeds of
sub-sales in an effort to recover a sum equal to the
original selling price. This can only be done by a charge
on the book-debts of the buyer and as we shall see
requires registration.
The distinction between the two large categories,
however, has been clouded in several ways. Firstly some
sellers using clauses in the first category stipulate that no
consequences shall follow until and unless the buyer
becomes insolvent, and that when he becomes so he will
"assign" all proceeds of sub-sales to the seller. As we
shall see, this assignment is really a fiction as the
entitlement to the proceeds never vested in the buyer
because he was never, in the first place, entitled to the
goods he sold.
Secondly, the distinction has been clouded by the fact
that sellers under the second category have stipulated in
their clauses that they shall have the right to "trace" into
the hands of buyers to recover sums received on sub-sales
equal to the amount due on the original purchase. We can
now say that no such right is conferred by such a clause
and that the only rights such a seller may rely on are his
rights under the registered charge on the buyer's book
debts. The distinction has been further clouded by the
buyer contractually agreeing with the seller that he will
charge sufficient of his book debts not only to cover the
GOODBODY
original purchase price, but also to cover any sum which
at the time of his insolvency was then due to the seller.
This perhaps gives a false impression of an equitable right
over and above the original sale.
PROBLEMS
Many problems have arisen as a result of the
introduction of such clauses. These arise principally in the
spheres of banking, accountancy and taxation. Thanks to
the Factors Act and to the Sale of Goods Act the
problems are greatly mitigated in business, although such
respite may prove to be brief as we shall later see.
Business must also deal with the problems inherent in the
concept of implied agency as introduced by the Courts in
an effort to come to a logical conclusion as to the rights
as between the parties. Thus, although the Courts have
expressly stated that warranties (perhaps extravagant) of
buyers will not bind sellers and render them liable, this is
by no means the last word cm the matter. Problems may
also be encountered with reference to V.A.T.
In order to explain the rationale behind the effect of
these clauses it is necessary to distinguish not only
between possession and ownership, but also between the
different types of ownership. The significance here is that
"title" is not synonymous with ownership, but relates
solely to the legal ownership of the goods which may be
either inclusive or exclusive of the equitable or beneficial
ownership. Such an exclusive situation may arise where A
buys goods from C and has them invoiced to B. Here B
has no equitable claim, and may only have beneficial
"ownership" so long as A allows him to exercise it. Thus,
contrary to a commonly held opinion, there is no
distinction between equitable or beneficial ownership
unless one chooses to equate "beneficial" with a state of
possession, which being a mere fact cannot amount to a
form of ownership.
For the purposes of explaining the rationale behind
retention clauses we will assume that the three parties
involved are as follows:
(i) a Manufacturer of the goods (hereinafter called
"No. 1")
(ii) a Wholesaler of the goods (hereinafter called "No.
2") and
(in) a Sub-purchaser from the Wholesaler (hereinafter
called "No. 3").
There are two limbs to the average true blooded
retention clause. First, ownership in goods "sold" to No.
2 remains in No. 1 despite possession changing hands
until all monies due by No. 2 to No. 1 have been paid.
This does not, however, prevent No. 3 from obtaining
title to the goods under section 9 of the Factors Act,
1889 and Section 25 (2) of the Sale of Goods Act, 1893.
Thus, so that No. 1 may rest better assured of receiving
payment, the second limb of the clause may provide that
No. 2 will assign all debts due to him by No. 3 to No. 1.
This may be done by way of charge of book-debts and if
so done then it must be registered under section 99 of the
Companies Act, 1963. But to do so is unnecessary as it
may be done by way of assignment simpliciter where legal
title has been retained. Where equitable title has been
retained the Seller may claim it as beneficiary as of right.
The legal effect of the first limb of the retention of title
clause is as follows: No. 1 retains the title and sometimes
the beneficial ownership in the goods until all monies due
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