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CML - WS 3 - Retention of Title
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Workshop 3 – Retention of TitleRETENTION OF TITLE CLAUSES
OWNERSHIP VS POSSESSION
The result is that it is perfectly possible for one party, often the buyer, to have possession but not ownership of
the goods. Deciding who has ownership of the goods, and when, is important for a number of reasons.
Insolvency
In the event of the insolvency of either of the parties, the goods come under the control of the liquidator,
administrator or trustee in bankruptcy, and there is a risk that they may be sold.
However, if the seller has a valid retention of title over the goods (ie ownership has not passed) then it may
be able to reclaim them before they are sold and thus recover the full value of the goods.
Risk
Under s 20, prima facie risk passes with ownership, so where the parties have not made specific provision for
the passing of risk, and the goods are damaged or destroyed, it is important to know who has ownership of
the goods to establish liability.
If the goods are damaged or destroyed by a third party, e.g. a carrier, it will be necessary to establish who
has the right to bring a claim against the carrier.
Seller’s action for the price
Retention of title clauses can create difficulties in relation to the application of s 49 of the SGA 1979. P.68.
Page 68 – other relevant case law also.
TRANSFER OF OWNERSHIP
Specific or ascertained goods
(a) Ascertained goods are goods that can be identified at the time of the contract.
(b) Specific goods are goods which have been agreed on at the time of the contract.
(c) Section 17 of the SGA 1979 provides that the property in ascertained goods passes when the parties intend it
to pass
Unascertained goods
Unascertained goods are goods which have not yet been identified. Unascertained goods may be generic
goods, for example 100 kilos of potatoes or goods forming part of a bulk, or 100 kilos of potatoes out of 500
kilos.
s 16 makes it clear that property cannot pass until the goods are ascertained.
DEFAULT PROVISIONS WITHIN THE SALE OF GOODS ACT 1979
Where the parties have failed to make provision for the passing of ownership, there are default provisions in s 18.
1) Rule 1 deals with unconditional contracts for the sale of specific goods in a deliverable state. Property passes
when the contract is made. A simple example is when a customer buys a chocolate bar in a shop. Ownership
passes when the money is handed over and the customer receives the chocolate bar.
2) Rule 2 deals with conditional contracts where the goods exist but the seller is bound to do something to put
the goods into a deliverable state, eg the buyer agrees to buy 100 kilos of potatoes (specific goods), but the
seller has to package them into 1 kilo bags before delivery. Property passes once the seller has done this and
given notice to the buyer.
3) Rule 3 deals with conditional contracts where the goods exist in a deliverable state but the seller has to
weigh, measure, test the goods or ‘do some other act’ to ascertain the price. Property passes when the seller
has done this and given notice to the buyer.
4) Rule 4 deals with goods delivered on approval or sale and return. Property passes when the buyer approves,
accepts the goods, ‘otherwise adopts the transaction’ or retains them beyond any fixed time for their return
(or if none, beyond a reasonable time).
5) Rule 5 provides that property in unascertained goods passes in two situations, either when:
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, Workshop 3 – Retention of Title
(a) unascertained goods are unconditionally appropriated to the contract by one party and the other
party assents to this, either expressly or impliedly, for example 100 kilos of potatoes are weighed
and put into a container for transportation; or
(b) The seller delivers the goods (either to the buyer or a carrier) and the buyer assents to this, either
expressly or impliedly.(page 69 – 70)
THE BASIS FOR A ROT CLAUSE
Section 19 provides the basis for retention of title. It provides that a seller may ‘reserve the right of disposal of
goods until certain conditions are fulfilled’. Therefore a seller who is allowing its buyer a credit period can
stipulate that ownership will not pass to the buyer until the buyer pays for the goods. The seller retains ownership
until that condition is fulfilled.
INTRODUCTION TO RETENTION OF TITLE
The effect of ss 17 and 19 therefore, is to give the seller the right to reserve title to the goods. This can be
done in a contract of sale by inserting a retention of title (ROT) clause.
The idea of retaining title to the goods until they are paid for, or until they are sold on or used up (as with
components/ingredients, etc), is that, in the last resort, the seller can recover its own goods and prevent a
liquidator or trustee in bankruptcy of the buyer disposing of the goods
The advantage for the buyer is that, up until such time as the seller might need to rely upon its ROT clause,
the buyer is free to sell or deal with the goods as it wishes
Creation of CHARGES
A charge is a right granted over an asset or assets to secure a debt. It gives the charge holder priority to be
paid ahead of unsecured creditors in the event of insolvency.
If the charge is not registered, s 859H provides that it will be void against a liquidator or an administrator,
and also against other unsecured creditors.
Simple ROT clauses do not generally create registrable charges over the buyer’s assets.
Problems only arise where the clause attempts to go further than simply retaining title to the goods and
gives the seller rights over the buyer’s property. These include attempts to retain title to either the
proceeds of sale of the original goods, or products which have been mixed with or manufactured into other
goods. Any such attempt would create a charge, which would be void against a liquidator, an
administrator or a third party unless registered****. – page 70.
In practice, it is not going to be practical to register these charges.
PROCEEDS OF SALE – p.71
Where the goods have been sold on to an innocent third party, under s 25 of the SGA 1979 an innocent third
party will get good title to the goods.
If a buyer of the goods sells them on, the sub-buyer will get good title to those goods.
The proceeds of the sub-sale sale will belong to the buyer, and not to the seller.
Any attempt by the seller to claim or trace the proceeds would therefore amount to an attempt to claim the
buyer’s property and so would amount to a charge.
SEPARATION OF PROCEEDS – p.71
The clause may also provide that where the buyer sells the goods on, it will pay the proceeds of sale into a
separate bank account, which it will hold on trust for the seller.
MIXED, MANUFACTURED OR ALTERED GOODS – p.72
Problems also arise where the original goods have been used in a manufacturing process and have lost their
original identity.
Where the goods have been incorporated into other products, the original goods are considered to have
been subsumed into the new products and the seller has no right to the new products.
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