The English Court of Appeal decision in Caterpillar v John Holt & Company, and its analysis of “retention of title” and “no set-off” clauses, will be of interest to commodity traders, compliance officers and legal counsel in industries dealing with energy and natural resources internationally.

Retention of title clauses are often used by sellers, to ensure that title to goods sold does not pass to the buyer, until the buyer has paid the price in full. This is done primarily to protect the seller in the event of the buyer‟s insolvency, since the goods would not form part of the buyer‟s assets to be distributed to creditors. In addition, it also helps the seller to maintain an action for the price, which is a debt claim, and avoid having to prove actual loss, or delve into matters such as  causation, mitigation, assessment and contributory negligence.

A seller‟s right to collect payment based on retained title is codified under English law, Under section 49(1) of the Sale of Goods Act 1979 (“SGA”), a seller may maintain an action for the price where property in the goods has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods in accordance with the terms of the contract.

Likewise, “no set-off” clauses are often used by sellers to prevent their buyers from making disputed deductions on amounts due to the seller, which in turn oblige the seller to have to commence legal proceedings to „claw back‟ the disputed sums, instead of the buyer being the one to attempt such „claw back‟.

In Caterpillar (NI) Ltd v John Holt & Company (Liverpool) Ltd [2013] EWCA Civ 1232, the English Court of Appeal (“CA”) gave a detailed judgment relating to the operation of retention of title clauses and no set-off clauses, which settled some old questions, whilst at the same time raising new ones.

The Facts

Caterpillar manufactured and sold generator sets to Holt, on certain credit terms. Holt in turn re- sold the goods to its subsidiary in Nigeria. The contract incorporated Caterpillar‟s standard trading terms, including a retention of title clause and a no set-off clause. Holt failed to pay the invoices when they were due, and asserted that there was a subsequent settlement under which Caterpillar was bound to supply certain minimum monthly quantities to Holt. Holt and its subsidiary commenced a USD53 million action against Caterpillar for breach of an exclusive distributorship agreement relating to the sale of Caterpillar‟s products in Nigeria. Caterpillar then commenced this present action for the price, claiming USD12.6 million.

The title and risk clauses provided that “…title shall not pass to Buyer until Seller has received payment in full … Until such time as title passes, Buyer shall hold the products as Seller‟s fiduciary agent … Prior to title passing Buyer shall be entitled to resell or use the goods in the ordinary course of business and shall account to the Seller for the proceeds of sale…” Another clause provided that nothing in the contract shall be deemed to create “an agency, joint venture, partnership or fiduciary relationship between the parties …” Separately, the payment clause provided that “… Buyer shall not apply any set-off to the price of Seller‟s products without prior written agreement by the Seller…”

Holt took the position that its Nigerian subsidiary had taken delivery of the goods and had become their legal owner, and argued that it had an arguable set-off defence due to the distributorship agreement claim and the settlement. The case therefore turned on whether (a) Caterpillar had a claim for the price, (b) the set-off clause was effective, and (c) the claim for price could only be brought under section 49(1) of the SGA.

The Decision

The CA affirmed, unanimously, that retention of title clauses had to be considered as a matter of construction in each case, and courts should not get bogged down in comparisons with other clauses construed in other cases.

By a 2-1 majority (Justice Patten and Justice Floyd), the CA found that title did not pass to the buyer Holt due to the retention of title clause in this case as the price had not been paid. However, the reasoning differed as between the two majority judges.

Justice Patten found that Holt could not be a trustee of the goods as it did not have title to it. Nevertheless, Holt acquired a title to the monies paid into its account by its subsidiary/sub-buyer, from which time it would be required to account to Caterpillar for the entire proceeds of sale (and not just the outstanding amount) as a fiduciary agent throughout the process of the sub-sale. He also dismissed the “no agency” clause on the basis that it was intended to limit the parties to an ordinary seller-buyer relationship on the contractually agreed terms, without prejudice to the agency specifically imposed under the retention of title clause.

Justice Floyd likewise found that title did not pass in this case, for the above reasons stated by Lord Patten. However, he also stated that according to the natural reading of the clause, the goods remained Caterpillar‟s property immediately before and at the moment of the sub-sale, and that property never passes to Holt under those arrangements. In this regard, he found that Holt held the goods as Caterpillar‟s fiduciary agent for the entire period “prior to title passing”, and

that any sub-sale during this period would be as Caterpillar‟s fiduciary agent.

Justice Longmore, on the other hand, found that property had passed to Holt at the time of (or momentarily before) the re-sale to Holt‟s subsidiary. He took the view that the retention of title clause in this case was intended to operate as a security over the sale proceeds for sums due to Caterpillar, and the clause did not make Holt Caterpillar‟s agent. In coming to this conclusion, he relied, amongst other things, on the “no agency” clause and the proposition that the no set-off clause could only operate if there was a claim for the price, which in itself negatives any intent to create an agency relationship. He also found that it would be remarkable for the relationship to have transformed from seller-buyer to that of principal-agent just because credit had expired and been unpaid, in the absence of clear words to that effect and particularly when the seller had no control over the terms on which the buyer on-sold.

The CA unanimously held that the phrase “any set-off” was wide enough to cover legal as well as equitable set off. Hence, the no set-off clause was upheld in Caterpillar‟s favour. The CA also unanimously found that a claim for price can only be brought under section 49 of the SGA, and Caterpillar cannot have a claim for price independently of that section.

Commentary

The three judges reached their individual conclusions via different reasoning, and even the two judges who formed the majority decision on the interpretation of the retention of title clause had somewhat different views.

It would be worthwhile for sellers to review their retention of title clauses carefully, to ensure that their clause does in fact achieve the intended result of protecting the seller from the buyer‟s insolvency and facilitate a straightforward action for the price. This, in turn, also links to the question of the due date for payment of the price, and when does property pass to allow a claim  for price to be made.

In addition, consideration may also need to be given to the precise relationship between the seller and buyer, insofar as the disposal and on-sale of the goods to downstream parties is concerned, as evidenced by the conceptual difficulties faced in the Caterpillar case on the agency and trust issues. A no agency clause may or may not be sufficient.

Another issue to be considered is whether it is possible for a seller to make a non–statutory claim for the price, by way of appropriately worded contract terms. For such a right to exist (if at all), the clause must likewise be effectively worded to achieve that effect.

Another possibility would be for a seller to try and rely on section 49(2) of the SGA, which provides that an action for price may be maintained if “the price is payable on a day certain irrespective of delivery and the buyer wrongfully neglects or refuses to pay..” even if property has not passed and the goods have not been appropriated to the contract. However, even in such a case a seller would have to be careful not to have prejudiced his right to claim for the price by way of subsequent conduct.

Given the foregoing, a seller would do well to be mindful that having an overly complicated retention of title clause or no set-off clause may be detrimental, and it may be more appropriate for such risks to be mitigated in the contract in other ways.

The Court of Appeal gave permission to appeal to the Supreme Court, and Holt‟s claim remains outstanding, so more judicial guidance on the above issues may well be forthcoming in the future.