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 main source of the seller’s right to reserve the right of disposal is section 19(1) of the Sale of Goods Act 1979, which provides that:

“Where there is a contract for the sale of specific goods or where goods are subsequently appropriated to the contract, the seller may, by the terms of the contract or appropriation, reserve the right of disposal of the goods until certain conditions are fulfilled.”

The seller’s reservation can be express or implied. In practice, it is usual for sellers to insert an express RT clause into their sale contracts. In practice, RT clauses come in various shapes and sizes. Under English law, the effect of RT clauses is mainly governed by case law.

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

Due to the rule of freedom of contract, parties to a sale contract can define their rights and obligations under an RT clause, but it will be for the courts to “characterise” the interests that the parties created by the clause and the nature of their relationship. Hence, the labels chosen by the parties in their RT clauses are not decisive when determining the effect of these clauses.

It is also possible for the seller to reserve the right of disposal unilaterally by conditionally appropriating the goods to the buyer to secure itself against non-payment of the price or the insolvency of the buyer. With regard to the sale of goods to be carried by sea, section 19(2) of the Sale of Goods Act 1979 raises a presumption that a seller has intended to reserve the right of disposal where the bill of lading covering the goods shipped is made out to the order of the seller or his or her agent.

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

In addition to the explanations above, there are other forms of security preserving the seller’s rights to the goods. Section 19(3) of the Sale of Goods Act 1979 provides that on receiving a bill of exchange and a bill of lading from the seller, the buyer is bound to return the bill of lading if he or she decides not to honour the bill of exchange. If the buyer retains the bill of lading wrongfully, the property in the goods does not pass to the buyer.

In the case of a buyer’s insolvency, an unpaid seller that has parted with possession of the goods has the right to stop them in transit and to retain them until payment of the price (section 44, Sale of Goods Act 1979).
[Page226:]

In order to secure payment of the goods, a pledge over the goods can alternatively be created by the pledge of a document of title covering the goods, such as a shipped bill of lading in transferable form. This form of security is in use particularly by banks financing the sale of goods under letters of credit.

  1. 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?

In domestic sales, risk passes with property, unless the sale contract provides otherwise. The net result of this is that if the seller retains title to the goods under an RT clause in the sale contract, the risk prima facie remains with it. For this reason, it is necessary for the seller to insert a clause into the sale contract for the risk to pass on delivery of the goods to the buyer.

Unless international sale contracts provide otherwise, the risk of loss of or damage to goods passes to the buyer once the goods are delivered. In sale contracts on shipment terms, the goods are deemed to be delivered on shipment.

Thus, the passing of risk is divorced from the passing of property in such sales. The risk of loss of or damage to goods in transit passes to the buyer on or as from shipment. The result of the rule on the passing of risk is that the seller can maintain an action for the price even in cases where the goods are lost or damaged in transit.

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

If what purported to be an RT clause in fact amounts to a security interest, usually identified as a floating charge, the clause will need to be registered. If not registered, the clause will have no effect in the event of a buyer’s receivership or insolvency.

In its simplest form, an RT clause postpones the passing of property to the buyer until the full purchase price for the goods has been paid. For the seller’s rights under such a clause to be effective, the clause need not be registered. The reason for this is that RT clauses of this type are not considered as a security by way of charge granted by the buyer.

In practice, it is common to see extended forms of RT clauses. In the case of an all-moneys clause, the seller retains the general property until the buyer has paid not only the price of the relevant goods but all sums owed to the seller under prior or subsequent contracts. RT clauses of this type do not create a charge and therefore there is no registration requirement.

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

[Page227:]
A sub-sale of the goods by the buyer usually breaks the RT. The mere fact that there is a simple RT clause does not automatically give the seller a claim against the proceeds of sub-sales by the buyer. However, if an RT clause expressly provides that the seller will acquire ownership of the proceeds of the sub-sales of their property by the buyer, the seller may be entitled to trace and claim the proceeds. This is particularly the case where the buyer holds the relevant goods as a bailee and where a fiduciary relationship exists between the buyer and the seller. For the right to trace to exist, the buyer should also have kept the proceeds in a separate account. Alternatively, it may be possible for an RT clause to be interpreted in such a way as to create an agency relationship with the buyer and the seller. In such cases, the clause will not be characterised as giving rise to a charge and there would therefore be no need for registration.

In most cases, an RT clause purporting to cover the proceeds of sub-sales is characterised as a registrable charge.

Once the goods are attached to larger or smaller chattels or altered in the manufacturing process, the seller’s RT may persist if the original identity of the goods is not lost. Hence, if the goods retain their identity, the seller may have a right of repossession and resale if there is a sufficiently worded RT clause.

The transformation of the goods will usually break RT. In relation to new goods manufactured by the buyer, it is likely that the courts will not give the seller a shared interest in the final product. Any interest specifically provided in the sale contract is likely to be characterised as a charge.

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

Once the buyer sells on the goods to a sub-buyer, the sub-buyer can acquire a good title to the goods provided that he or she purchases the goods in good faith (without knowledge of the circumstances).

There is a possibility, however, to transform the RT where both the contract of sale and the sub-sale agreement contain an RT clause. In such cases, the seller under the contract of sale can repossess the goods that are in the sub-buyer’s possession where neither the buyer nor the subbuyer has paid the price of the goods.

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

Where the parties are solvent, the buyer’s failure to pay the price does not necessary bring the contract to an end. Although a contract of sale may still subsist despite the buyer’s failure to pay, the seller may choose to bring the contract to an end by accepting the buyer’s non-payment as repudiation. A properly worded RT clause usually allows the seller to repossess and resell the goods when they have not been paid for by the buyer.
[Page228:]

Ordinary court proceedings will be applied to resolve the disputes surrounding RT. However, the process can be speeded up by way of summary judgment within a few months if the dispute is fairly straightforward. Depending on the strength of the case, the seller can also obtain interim relief from the court to preserve its rights in pending litigation.

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

A simple RT or all-moneys clause provides the seller with a proprietary interest over the original goods, giving the seller priority over the unsecured creditors if an unpaid buyer becomes insolvent. If the seller wishes to preserve its property rights over the proceeds of sub-sales and newly manufactured goods, two conditions must be satisfied: firstly, the RT clause should be sufficiently worded to cover these claims; secondly, the clause must be registered.

Under English law, the carrier’s lien over the goods carried is a possessory lien, giving rise to a right to retain possession of the goods to secure payment. The right survives the insolvency of the debtor, and it should therefore be given effect by discharging the debt before distributing the assets to any other creditors.

  1. Bankruptcy — interaction of RT (which is not contract law) and bankruptcy law
  1. Goods still with buyer

Once a company goes into administration or an application for an administration order or for the appointment of an administrator is made, no steps can be taken to repossess goods that are in the buyer company’s possession unless this is permitted by the administrator or the leave of the court is obtained.

The Insolvency Act 1986 creates a moratorium regarding the enforcement of RT rights. Once the moratorium is in effect, the seller will not be able to take any steps to repossess the goods that are still with the buyer company.

  1. Goods already sold by buyer

If the goods had already been sold to a third party before the buyer company went into administration, it is possible for the third party to obtain a good title to the goods.

If the administrator sells goods that were covered by a valid and effective RT clause, the administrator will be liable in tort for wrongful interference with the seller’s goods. However, the administrator may relieve itself of liability if it had “reasonable grounds for believing” that it had the right to sell on the goods to a third party.

  1. Time limits to declare title to receiver

[Page229:]
On completion of liquidation, the buyer’s company will be dissolved and the company will cease to exist. Nonetheless, it can still be possible to raise a claim against a dissolved company by applying to the court to obtain an order for the restoration of the company to the register. It is possible for a dissolved company to be restored up to six years following the date of dissolution.

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

Under English law, a buyer that has taken possession of the goods under an RT clause can be considered as a bailee of those goods for the seller. Thus, the receiver can initially pay and then recover from the seller all reasonable expenses incurred to care for the goods.

  1. Model clause(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,

In order to draft a simple RT clause, the use of the expression “equitable and beneficial ownership” should be avoided. An RT clause providing that “the equitable and beneficial ownership shall remain with the seller until full payment has been received” will create a charge and will therefore require registration.

For the seller to be entitled to trace the proceeds of the sub-sales of their property by the buyer, the use of the word “fiduciary” in an RT clause may be insufficient to characterise a relationship as fiduciary, particularly in the case of an “arm’s-length” sale. A contract giving the buyer liberties to deal with the goods usually negates any fiduciary relationship.

The RT clause should also include provisions:

  • requiring the seller to ensure that the goods (and the proceeds of sub-sales where permitted) are stored separately from other goods; and
  • granting the right to access the buyer’s property to repossess the goods and to check whether the storage requirements are complied with.

In the case of domestic sales, the sale contract should also expressly state that the risk will pass to the buyer on or before delivery of the goods.

Where the seller seeks to incorporate its standard terms, including an RT clause, into a sale contract, he or she must give reasonable notice of the terms on or before the conclusion of the contract.