There is no inconsistency between a simple retention of title clause and an implied, or even express, right of a buyer to sell on the goods before paying the seller. So held the Court of Appeal in giving judgement in Fairfax Gerrard Holdings Ltd and others v Capital Bank Plc (now Bank of Scotland Plc by substitution) on 27 November 2007.

Retention of title (ROT) clauses

Sometimes also known as reservation of title, or Romalpa clauses (after the well-known case Aluminium Indusiey Vaasen Bv v Romalpa Aluminium (1976) 1 WLR 676), a ROT clause is a clause in an agreement for the sale of goods whereby the seller seeks to reserve the ownership of those goods until certain conditions are met, usually payment in full. They provide a method of taking security for the seller and an alternative to the taking of a charge, or the use of other secured financial instruments.

ROT clauses remain popular because of their perceived ease of use and incorporation into a sale contract by the use of a simple clause.

The factual background

Dimond International Limited imported some large and quite expensive printing machines from a Chinese supplier, Shenzhen, for onward sale to its UK-based customers, in this case Carrprint Limited. Dimond needed finance to import the machine and accordingly entered into a finance agreement with Fairfax.

The finance agreement provided for letters of credit being opened in favour of Shenzhen, the machine being imported, and then sold to Dimond. It also contained a simple retention of title clause whereby Fairfax purported to retain title to the machine pending payment in full by Dimond.

Carrprint also required finance to purchase the machine from Dimond, which it obtained from Capital Bank. Capital Bank agreed to purchase the machine from Dimond and hire it to Carrprint on finance terms.

Dimond took possession of the machine upon its arrival in the UK, commissioned it, and then delivered it to Carrprint. Capital Bank paid Dimond. However, before Dimond had paid Fairfax in full, Dimond went into liquidation. Seeking a defendant who could honour a judgment, Fairfax sued Capital Bank for conversion of the machine by leasing it to Carrprint and collecting the rentals, claiming that it had retained title to the machine pursuant to the retention of title clause in the finance agreement with Dimond.

At first instance

Before HHJ Mackie QC, Capital Bank argued that Fairfax had given Dimond actual authority, express or implied, to sell the machine. Alternatively, Capital Bank argued that the title to the machine passed by virtue of sections 2(1) and 9 of the Factors Act 1889. This provides statutory exceptions to the nemo dat quod non habet principle of English law which, literally translated, means that you cannot pass better title than you have got yourself. Though beyond the scope of this note, these sections provide for the passing of title to goods where the sale is by a buyer, who has possession of goods entrusted to it by an unpaid seller, and where the second buyer takes in good faith and has no notice of a right of an original seller.

HHJ Mackie QC held that there was no express or implied term in the finance agreement for Dimond to sell the machine on. He found that Capital Bank could not rely upon the Factors Act exceptions as set out above, one reason being that one of Capital Bank's employees was aware that Fairfax had financed the import, though not the exact terms in place between Fairfax and Dimond. It is important to note here that no impropriety or bad faith on the part of Capital Bank was alleged by Fairfax or found by the Court.

Fairfax was awarded £132,500 as damages for conversion. Capital Bank appealed on the limited ground that the finance agreement between Fairfax and Dimond gave actual authority to Dimond, express or implied, to sell the machine, including to a finance company. Otherwise, the whole purpose of the import transaction would have been stultified (to borrow the words of Roskill LJ in Romalpa).

Before the Court of Appeal

The Court of Appeal focused on the finance agreement. The most critical term stated:

“We [Fairfax] shall open Letters of Credit in our name and sell the machine to you with the reservation of title and subject to the terms of our standard trust receipt. You will invoice your customers with the debt assigned to us...”

The finance agreement also stated that:

“We [Fairfax] shall retain title to the machine until we have been repaid in full.”

The standard trust receipt terms provided that, in consideration of Fairfax releasing the goods in order that they may be sold, Dimond agreed that the goods remained Fairfax’s property until they had been paid for in full. The terms also provided that Dimond would hold the sale proceeds of the goods on trust for Fairfax in a separate bank account. 

Fairfax argued that the finance agreement contemplated a trust receipt being signed and returned by Dimond before it could have authority to sell the machine. In fact, Dimond did sign and return a trust receipt relating to an identical machine described as having been ordered by the Print Factory (London) 1991 Limited. Dimond decided that the machine ordered by the Print Factory was to be delivered to Carrprint and thus an identical trust receipt was sent to Dimond, save that the machine was described in this document as having been ordered by Carrprint. However, the second trust receipt was never signed.

The legal context

A number of cases on retention of title clauses were cited by Capital Bank, commencing with Romalpa, which case established that there could be an implied power of sale in a simple retention of title clause. However, the Court recognised that the only case where the unpaid seller seeking to retain title sought to suggest that title had not passed on a resale to the ultimate customer was Four Point Garages v Carter (1985) 3 All ER 12. In that case Simon Brown J held, in the context of a motor dealer selling cars, that it would be unreal if there was no implied right of sale in the simple retention of title clause.

The decision

The Court of Appeal found that the finance agreement recognised, by implication, that prior to Fairfax being paid, Dimond had the authority to deliver and pass title to its customer, or its chosen financier, with Fairfax’s interest then converting to the proceeds of sale which were to be held on trust for them.

As regards the inconsistency between the finance agreement and the trust receipt, the position as set out in the trust receipt could only ever apply if the proceeds of sale came into the hands of Dimond. That, of course, should not have happened given the requirement in the finance agreement for the assignment notice on Dimond’s invoice.

Therefore, the Court of Appeal disagreed with Fairfax that its own document should be rejected because it was not consistent with the finance agreement, or made commercial nonsense. On the contrary, the trust receipt in fact confirmed that Dimond should have authority to sell, and that document could be naturally incorporated into the finance agreement. It was also difficult for Fairfax to argue collaterally that until the trust receipt was signed, no authority was given to pass title.

Furthermore, the Court held it was not a precondition to the authority to pass title in the finance agreement that Dimond should have executed an assignment or put the notice on the invoice to its customer. Nor was it appropriate to imply such a term, nor could the finance agreement be construed as requiring Dimond to sign the trust receipt before there was authority to sell.

The Court of Appeal re-iterated the position in the aforementioned authorities that there is no inconsistency between a retention of title clause and an implied, or even express, right for a buyer under such a term to sell on goods. It was possible for Fairfax to enforce the retention of title clause as against the machine only insofar as the machine remained in the possession of Dimond. Thereafter, Fairfax’s interest was in the proceeds of sale.

Accordingly, Capital Bank did not unlawfully convert the machine, the appeal was upheld, and Fairfax’s claim was dismissed.

Comment

Although to an extent based on the true construction of Fairfax’s own finance agreement, the case is a reminder that retention of title clauses are a clumsy and unreliable method of taking security. This is particularly the case in one off large scale transactions, and / or where the seller envisages its goods will be sold on by the buyer. Sellers, suppliers, and trade financiers take note!

The case should also prove useful to other finance and leasing companies whose title to goods are challenged by original sellers purporting to rely on ROT clauses. This is whether or not their existence in the prior transactional chain is known, and where the Factors Act exceptions cannot be applied. For an update on the steps you can take, see our action points.