Incoterms_® and Commercial Contracts

1. What rules, if any, govern retention of title (RT) in your country? In the absence of rules, what are the principal mechanisms, if any, on which RT is based in your country?

The law relating to RT in Ireland was codified in 1893 with the passing of the Sale of Goods Act 1893 (the 1893 Act). Although the 1893 Act has been subject to amendment by the Sale of Goods and Supply of Services Act 1980, the provisions contained within it relating to RT clauses remain unaffected by those amendments.

The legal basis for an RT clause is found in Section 17 of the 1893 Act which states that title to goods pass when the parties to the relevant contract so intend. Section 19 of 1893 Act also provides that a seller may, by contract or appropriation, reserve the right of disposal of specific goods, pending the fulfilment of conditions.

2. Please describe the characteristics and scope of your country’s RT rules

Legislative provisions authorise the seller of goods to insert a term into a contract of sale providing that title to the goods is not passed from the seller to the buyer until a specified condition is fulfilled. The condition is often that the purchase price of the goods must be paid in full or even that the buyer must discharge all its indebtedness to the seller arising out of other transactions.

In addition to the legislative provisions contained within the 1893 Act, RT clauses in Ireland are regulated, extensively, by the common law. Irish case law on RT clauses is almost exclusively in the context of customer insolvency, the central issue being whether the clause in question amounts to a valid RT clause. Unfortunately, some of the more significant court decisions conflict on the main principles to be applied. Each decision is usually rationalised by reference to the particular facts of the case in question.

3. If RT is not regulated in your country, are there similar or commercially equivalent forms of security preserving seller’s rights to the goods?

RT is regulated in Ireland by the legislative provisions and case law referred to above.

4. What is the relation of RT and passage of risk in your system? How may a seller protect its interest after the passage of risk?

The rules pertaining to the passage of risk are located at S.20 of the 1893 Act which seeks to allocate responsibility as between seller and buyer for any loss of, or damage to, goods that is not attributable to the act or fault of either party. If goods are damaged while at the seller’s risk, he or she will be required to repair or replace them in order to perform its obligations under the contract.
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In this regard, the default position set out in S.20 of the 1983 Act, in effect, restates the common law rule (res peruit domino) meaning that, if goods are lost or damaged, the loss is to their owner and therefore the presumption is that the risk and the property pass together¹.

The rule in S.20 of the 1983 Act may be displaced by agreement between the contracting parties. Where goods are sold subject to a RT clause, the contract may provide that the transfer of risk is limited to the risk of loss or damage to the goods and that it does not confer and transfer any proprietary interest in the goods.

Understandably, from the seller’s perspective, the advantage of transferring risk ahead of ownership is the ability to pursue an action for the price of the goods in the event that they are lost or damaged. However, in order to protect oneself against suffering a loss, the seller will want the goods insured and, in general, the party who is in possession of the goods will be in a better position to do so. In this regard, the seller may wish to include the following within the conditions of sale:

1. an obligation on the buyer, on delivery, to insure the goods with a reputable insurance company;
2. reservation of a right to pre-approval of the insurance company; and
3. an obligation to note the seller’s interest in the goods on the insurance policy with a clear term included in the policy that the seller is to be given priority as an assignee of policy proceeds.

5. What are formal requirements, if any, including timing, to perfect the seller’s right?

In Ireland, the formal requirements for the creation of a proprietary right by way of an RT clause are those applicable to contracts for the sale of goods generally with no particular additional formalities required.

It is a general principle of contract law in Ireland that a party will not be bound by a term of a particular contract unless, at the time the contract was made he or she knew, or ought to have known, of its existence and the other party took all reasonable steps to bring it to his or her notice².

The buyer in a contract of sale will not be bound by an RT clause relied upon by the seller if it has
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not been brought expressly to his or her notice or he or she could not be expected to know of its existence through, for example, previous dealings between the parties.

Case law indicates that it is for the seller who is seeking to rely on an RT clause to prove it has been effectively incorporated into any contract between the parties. The Court will have regard to the facts of the case, such as the knowledge and prior experience of the parties, any documentary evidence and any previous dealings between the parties.

As each buyer of goods may intend to use them for a different purpose, for example, resale or use as a raw material, a number of different types of RT clauses have developed to try to protect a seller’s interest in the goods in each circumstance. The resolution of questions regarding the validity and the scope of an RT clause depend on the type of clause used by the seller.

It is arguable that the scope of certain types of RT clauses may in effect create a charge over the goods supplied which, in the case of a company, requires registration under S. 409 of the Companies Act 2014 to be valid and effective³. Whether a charge has been created will depend entirely on the construction and wording of the particular clause; however, generally speaking, for a charge to have been created, some form of property must pass to the buyer over which the seller is seeking to assert a security right. For example, case law indicates that where a RT clause purports to trace the goods supplied into a finished product or where the RT clause purports to trace into the proceeds of sub-sales, a charge will have been created.

In practice in Ireland, registration of a charge is usually effected by the chargeholder, as the consequences of non-registration are very serious from a chargeholder’s point of view. Indeed, S. 409 of the Companies Act 2014 confirms that if the particulars of the charge together with the instrument (if any) by which the charge is created or evidenced are not registered within 21 days, the charge, insofar as it confers any security over the company’s property, is void against any liquidator, or administrator, and any creditor of the company. However, it should be noted that, failure to register a charge will not render it ineffective against the company itself.

6. Effectiveness

1. Does sale to a third party break RT? What if goods have been transformed or sold?

1. Sale to a third party

A seller of goods sold on the foot of an RT clause will have his or her claim defeated by a subsequent delivery of those goods to a bona fide purchaser without notice of the seller’s title. It has been held however, that in order for a seller’s claim to be defeated, there must be an actual
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sale and that delivery under a mere agreement to sell is not sufficient⁴.

2. Processing of goods

Where goods supplied subject to an RT clause are processed so as to render them unidentifiable or essentially different in character, case law indicates that the seller’s title will be extinguished by such processing⁵ unless the RT clause has created, and been registered as, a charge.

3. Fixing of goods to real property

Where goods which are the subject of an RT clause become fixtures attached to real property, the title to them will pass with the title to the land, thereby defeating the seller’s claim to them⁶. Where a seller’s claim to goods is defeated, seller may still have a claim against the buyer, or a person acting on the buyer’s behalf, such as a liquidator⁷.

There is a considerable dearth of Irish case law relating to these issues; however, they have been tested many times before the English Courts and this serves as a guide to the position that the Irish Courts would adopt in similar circumstances.

If yes, is there a possibility to transform the RT in case of a sale to a third party?

As set out above, if the third party has paid the buyer then title will pass to the third party — despite the seller not having received payment in respect of the goods supplied. The payment to the seller then becomes an unsecured liability of the buyer.

The common law doctrine set out above in relation to bona fide purchasers is also based on the premise that the contract in which the RT clause is incorporated exists between the seller and the buyer and is not enforceable against third parties. Notwithstanding this, case law does suggest that a seller can re-possess the goods in the hands of a third party where neither the third party nor the buyer has paid.⁸.

2. Enforcement of RT if delinquent buyer is not insolvent — What is the judicial procedure and what is its likely timeline?

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The means of enforcement of an RT clause would be to issue summary proceedings designed to determine, in an expeditious way, who benefits from ownership of the goods, i.e. the insolvent company or the seller. The timescales involved in obtaining judgment will depend on various factors including the attitude of the Defendant to the proceedings and the value of the goods involved. For example, if the goods are valued at over EUR 1 million then the proceedings may be capable of being heard in the Commercial Court where strict case management results in a more efficient progress.

3. What happens in case of conflict between RT and a buyer’s creditors’ rights, including carrier’s liens?

In Ireland the determination of priority of competing security interests is a complex and difficult area of law particularly as there are different types of security interests and methods of perfection.

In simple terms, the basic rule is that interests in priority primarily rank in the order of creation and the first in time will prevail; however, it is important to note that priority can in certain circumstances be defeated by, for example, a later bona fide purchaser without notice of the prior interest.

4. Bankruptcy — interaction of RT (which is not contract law) and bankruptcy law

1. Goods still with buyer

How the goods are dealt with will depend on the nature of the insolvency event which has been triggered:

• Liquidation

Under Irish law, the inclusion of a valid and enforceable RT clause means that a seller retains title to the goods until certain conditions have been fulfilled. If there is no RT clause in place, and the customer goes into liquidation, then the liquidator’s duty will be to collect in all assets, sell them for the best price possible and pay creditors a dividend. These assets will include the goods supplied (and not subject to an RT clause) even though they have not been paid for. The seller of the goods will rank as an unsecured creditor for any undischarged arrears of payment. In most liquidations, unsecured creditors do not receive any dividend. However, where the seller has included a valid and enforceable RT clause, the goods cannot be claimed by a liquidator (because they are not in fact owned by the company in liquidation until payment has been made). Pursuant to Section 631 of the Companies Act 2014 it is open to, among others, the Seller or the liquidator to apply to the court to determine any question which arises in the liquidation, which could for example include any question relating to the scope or validity of a disputed RT clause.

• Receivership

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A Receiver’s remit is limited to the secured assets over which he or she has been appointed. Goods subject to a valid RT clause will not be the property of the buyer until such time as they have been paid for in full (and/or any other conditions of the RT clause satisfied). Accordingly, the receiver will be precluded from dealing with RT assets. The receiver may however wish to test the validity of any purported RT clauses with a view to selling the secured assets it has been appointed to realise on behalf of the charge holder. Pursuant to Section 438 of the Companies Act 2014 it is open to, among others, certain creditors of a company or the receiver, to apply to the court to for directions in relation to any matter in connection with the performance or otherwise by the receiver of his or her functions, which could include for example matters relating to the scope or validity of a disputed RT clause.

• Examinership

Examinership is a process where a company in financial difficulties is placed under the protection of the court with an examiner appointed to formulate proposals for a scheme of arrangement for the restructuring of the company. The protection afforded by the court essentially takes the form of a moratorium on action being taken by creditors against the company for the duration of the court protection (which ranges from 70 to 100 days). The seller is free to assert its RT claim to the examiner but is precluded from taking any action to repossess its goods on the foot of an RT clause during the protection period.

2. Goods already sold by buyer

See previous answer at 6.a. above.

Where the seller is insolvent, and has delivered the goods, the insolvency event itself will not constitute a ground for rescinding or terminating the sale of the asset, and will not prevent the third party from acquiring title.

3. Time limits to declare title to receiver

Generally speaking when a company or an individual enters into a formal insolvency or enforcement process there are no formal time limits to be adhered to in terms of notification although it would be in the seller’s interests to do so as soon as possible. On the appointment of a receiver or liquidator the seller should notify the liquidator or receiver of his or her RT claim and seek access to the goods for the purposes of identification and removal of the goods. If the liquidator or receiver does not accede to such a request then the seller may wish to consider issuing proceedings seeking injunctive relief against the liquidator or receiver to protect its position, particularly if there is any imminent risk that the goods may perish or be disposed of. If the goods are disposed of, the seller should seek confirmation from the liquidator or receiver that the proceeds will be placed in a separate bank account pending the resolution of any dispute. In the case of a liquidation, it is recommended that upon receipt of a notice of a creditors’ meeting the seller should: assert its title to the goods; seek to agree an inventory of the goods with the buyer; seek an admission from the buyer that the RT clause forms part the supply agreement; and seek to retrieve the goods from the buyer if the buyer consents to such retrieval.
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Section 520(4)(e) of the Companies Act 2014 provides, in the context of restricting enforcement of security against a company under the protection of the court, that RT may not be enforced against a company in examinership. In such circumstances the seller should seek the consent of the examiner to the re-possession of the goods. If the examiner refuses (e.g. on the grounds that to do so the survival of the company during the protection period would be seriously prejudiced) then the seller should consider requesting that the use of the goods the subject of the RT clause be certified by the examiner as an expense of the examinership under Section 529 of the Companies Act 2014. At the outset of the examinership the seller may also consider making a request of the independent expert to recommend that the seller be paid in full in respect of those goods in his or her independent expert’s report.

4. Who pays storage, insurance and transport during discussions with receiver?

Unless otherwise expressly provided, the seller will be required to pay these costs in the first instance; however, failure to adhere to the terms of an RT clause would be considered a breach of contract and in such circumstances the buyer, in the normal course, would be liable for damages arising out of that breach and any such costs are likely to be recoverable.

7. Model clauses(s) — Drafting tips

NOTE: The following language is based on contractual provisions commonly seen in this country, but readers should always consult legal counsel before including an RT clause in a contract.

Please see below details of the types of RT clauses often seen in Ireland, their effect and the circumstances in which they can and should be used.

• Simple RT Clause

A simple RT clause purports to reserve title in the goods until the buyer has paid in full for the goods supplied in the particular invoice. Provided the goods supplied can be identified against invoices and have not been mixed with others or included in a manufacturing process so as to render them unidentifiable, these clauses will ordinarily be effective in reserving title with the seller.

A simple RT clause will not ordinarily require registration under Section 409 of the Companies Act 2014⁹.

However, if in a simple RT clause the seller reserves only the equitable and beneficial ownership in the goods, it has been held that this will have the effect of allowing the legal title to pass to the
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buyer¹⁰. In this case, the net effect will be that, following transfer of the property of the goods, the equitable title is granted back to the seller, and a charge created which will become void against the relevant company’s other creditors and its liquidator (if one has been appointed). However, as previously noted, an unregistered charge will remain effective against the company itself.

• All Sums Due Clause

All sums due clauses purport to reserve title until not only the purchase price of the goods has been paid, but also, any other outstanding sums owed by the buyer to the seller have been paid. Like a simple RT clause, provided that the goods supplied can be identified against invoices and have not been irreversibly mixed with others or processed so as to be unidentifiable, these clauses will ordinarily be effective in reserving title with the seller. The validity of this form of RT clause has been upheld in Ireland in a number of cases¹¹.

• Proceeds of Sale Clause

This form of clause purports to acknowledge that a buyer can sell the goods supplied in the ordinary course of business but provides that the proceeds of any sale are to be held (not necessarily, but often) in trust for the seller.

In Ireland, most case law indicates that such RT clauses constitute charges which unless they are registered pursuant to Section 409 of the Companies Act 2014¹² will become void against the relevant company’s other creditors and its liquidator (if one has been appointed). However, as previously noted, an unregistered charge will remain effective against the company itself.

• Aggregation RT clause

An aggregation RT clause typically provides that until such time as the goods have been paid for, not only will the title in those goods not pass, but the title in goods manufactured from the goods supplied, even where mixed with other goods not subject to the RT clause, will rest with the seller. This type of clause has almost invariably been held to constitute a charge over the assets of the purchaser company where the goods supplied have been irreversibly mixed¹³. However, where the goods supplied subject to the RT clause have been mixed but remain identifiable and separable from others, a simple RT clause will be effective in reserving title with the seller without constituting a charge¹⁴.

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