Title retention clause

A retention of title clause (also called a Romalpa clause in some jurisdictions^[1]) is a provision in a contract for the sale of goods that the title to the goods remains vested in the seller until certain obligations (usually payment of the purchase price) are fulfilled by the buyer.

Purpose

The main purposes of such clauses are to ensure that where goods are supplied on credit, if the buyer subsequently goes into bankruptcy, the seller can repossess the goods. Retention of title clauses are most prevalent in Europe (particularly in Germany). In North America they appear to be less common, and there may be a variety of reasons for this.^[2]

Legal analysis

Although conceptually very simple, retention of title clauses have become increasingly widely drafted, which has resulted in the courts in a number of countries striking down the clauses, or recharacterising them as the grant of a security interest. Several particular problems which have resulted in clauses

If for example, the clause reserves only part of the title to the seller (instead of reserving title to the whole thing) then in many jurisdictions this is construed as an equitable charge, and is often void if certain registration requirements are not complied with.^[3]

Problems can also arise where the goods sold are mixed with other goods of a similar nature, so that they are no longer identifiable (ie. a quantity of oil, or grain).^[4]

Many jurisdictions allow the buyer to re-sell the goods before title has passed to him (often this is the only way that he can pay the seller). In many jurisdictions such an onward sale passes good title to the subsequent purchaser, and the original seller loses title despite the clause^[5]

Where the seller tries to have a clause which provides that, if the buyer re-sells the goods, then the proceeds of sale of the goods shall be held on trust for the seller, this can be recharacterised as a registrable charge, which may also be void for non-registration.^[6]

Another frequently litigated problem occurs where the goods which are subject to the clause are then either improved (ie. raw thread is worked into cloth) or mixed with other raw materials to form a new product (ie. silica is used to make glass).^[7]

Sample clauses

Retention of title clauses will obviously vary from country to country, and even within countries they will usually be specialised to the form of industry used in, and the type of goods which are sold. The following are just two examples of the types of clause which can be seen.

A shorter form clause:

Title to {the Goods} shall remain vested in {the Seller} and shall not pass to {the Buyer} until the purchase price for {the Goods} has been paid in full and received by {the Seller}.

A longer form clause:

Title to {the Goods} shall remain vested in {the Seller} and shall not pass to {the Buyer} until the purchase price for {the Goods} has been paid in full and received by {the Seller}. Until title to {the Goods} passes:
1. {the Seller} shall have authority to retake, sell or otherwise deal with and/or dispose of all or any part of {the Goods};
2. {the Seller} and its agents and employees shall be entitled at any time and without the need to give notice enter upon any property upon which {the Goods} or any part are stored, or upon which {the Seller} reasonably believes them to be kept;
3. {the Buyer} shall store or mark {the Goods} in a manner reasonably satisfactory to {the Seller} indicating that title to {the Goods} remains vested in {the Seller}; and
4. {the Buyer} shall insure {the Goods} to their full replacement value, and arrange for {the Seller} to be noted on the policy of insurance as the loss payee.
Irrespective of whether title to {the Goods} remains vested in {the Seller}, risk in {the Goods} shall pass to {the Buyer} upon delivery.

Footnotes

^ Named after the decision in Aluminium Industrie v Romalpa [1976] 1 WLR 676
^ The two most commonly suggested reasons are (i) that the provisions under the UCC of most States in the U.S.A. limit the effectiveness of such clauses, and (ii) that under American bankruptcy law, the relative ease of obtaining a stay of creditor's rights in bankruptcy under Chapter 11 undermines the effect of such a clause. Whilst both reasons may apply to the U.S.A., it doesn't really indicate why they should be less popular in other parts of North America
^ For example, in England in Re Bond Worth Ltd [1980] Ch 228 such a clause was held to be void as it had not been registered within 21 days as required by section 395 of the Companies Act 1985
^ In most common law jurisdictions, so long as the clause prohibited mixing in this manner, the rule is that the buyer and the seller jointly own the whole mixture as tenants in common, see Indian Oil v Greenstone Shipping [1987] 3 WLR 869
^ For example, in England this is the effect of section 25(1) of the Sale of Goods Act 1979, and section 2(1) of the Factors Act 1889
^ In England, see E Pfeiffer v Arbuthnot Factors [1988] 1 WLR 150, although a differently worded clause was distinguished and upheld in Compaq Computer v Abercorn [1991] BCC 484
^ Generally speaking, in England, the law has been consistently applied that if the retention of title clause purports to apply to the new substance which has been made, then it takes effect as a charge and would be void if not registered, see for example, Re Peachdart [1984] Ch 131

[1] Named after the decision in Aluminium Industrie v Romalpa [1976] 1 WLR 676

[2] The two most commonly suggested reasons are (i) that the provisions under the UCC of most States in the U.S.A. limit the effectiveness of such clauses, and (ii) that under American bankruptcy law, the relative ease of obtaining a stay of creditor's rights in bankruptcy under Chapter 11 undermines the effect of such a clause. Whilst both reasons may apply to the U.S.A., it doesn't really indicate why they should be less popular in other parts of North America

[3] For example, in England in Re Bond Worth Ltd [1980] Ch 228 such a clause was held to be void as it had not been registered within 21 days as required by section 395 of the Companies Act 1985

[4] In most common law jurisdictions, so long as the clause prohibited mixing in this manner, the rule is that the buyer and the seller jointly own the whole mixture as tenants in common, see Indian Oil v Greenstone Shipping [1987] 3 WLR 869

[5] For example, in England this is the effect of section 25(1) of the Sale of Goods Act 1979, and section 2(1) of the Factors Act 1889

[6] In England, see E Pfeiffer v Arbuthnot Factors [1988] 1 WLR 150, although a differently worded clause was distinguished and upheld in Compaq Computer v Abercorn [1991] BCC 484

[7] Generally speaking, in England, the law has been consistently applied that if the retention of title clause purports to apply to the new substance which has been made, then it takes effect as a charge and would be void if not registered, see for example, Re Peachdart [1984] Ch 131

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