The case of Bulbinder Singh Sandhu (trading as Isher Fashions UK) v Jet Star Retail Limited (trading as Mark One) (in administration) highlights that care needs to be taken to ensure that Retention of Title (RoT) clauses are effective. More information on ROT clauses is available in our 'Litigation survival guide - part 3. Retention of title: sellers beware!'

The facts

Jet Star was a company which had been incorporated for the purpose of purchasing the high street retailer, Mark One. Isher had supplied clothing stock to Mark One prior to the sale to Jet Star. Isher continued to supply clothes and entered into a new contract with Jet Star. The contract included a typical "all monies" RoT clause so that ownership of all products supplied did not pass to Jet Star until it had paid all the monies it owed to Isher.

An all monies clause includes monies for the goods as well as any other monies owed by the purchaser to the seller. A basic RoT clause may provide for title to the goods in a particular shipment to pass when the purchaser has paid for that shipment (regardless of other payments that may be due). As part of its usual course of business, Jet Star would sell the goods to third parties.

The contract also dealt expressly with Isher's rights in the event of Jet Star's default (including Jet Star's administration). In such circumstances, Isher could terminate or suspend the contract without further liability and all monies owed by Jet Star would become immediately payable. However, these provisions did not expressly trigger any rights for Isher to rely on its RoT clause.

Jet Star entered administration. Isher demanded payment in full (as it was entitled to do under the default provisions). However, Isher did not terminate the contract or ask the administrator to trace, identify or deliver up items of stock, or rely in any way on its RoT clause.

Issues

While the RoT clause prevented title to the goods passing until Jet Star had paid all outstanding monies, other provisions in the contract (including the default clause) and the implicit understanding that goods could be sold in the usual course of business, permitted Jet Star (and the administrators) to continue to purchase and sell stock as usual.

Isher argued that the purpose of a RoT clause is to protect a seller (as an unsecured creditor) in insolvency and therefore should take precedence over other provisions of the contract. The RoT clause was intended to bite when Jet Star became insolvent; the contract should be interpreted in this way and the RoT clause should be given precedence over the default clause.

Decision

The court decided that it had to consider the RoT clause in the context of the contract as a whole. It decided that it was implicit in the relationship that Jet Star was entitled to sell the goods to third parties in its usual course of business and pass title without having paid Isher in full.

The court would not re-write the RoT clause so that it was automatically triggered by Jet Star's insolvency, particularly because the contract contained an entire agreement clause. The court was also not prepared to ignore the default provisions because these dealt expressly with the post insolvency situation – all monies became due and payable to Isher immediately.

The court's interpretation of the contract was influenced by the way the parties had performed it. In particular, the court referred to the fact that Isher had only demanded payment of the value of the stock and not delivery up.

Accordingly, the court found that the administrator was perfectly entitled to sell the goods and, rather than having to account for the net proceeds of sale direct to Isher, the administrator was entitled to divide the proceeds between all the creditors.

The position may have been different if (before the administrator had sold the goods) Isher had sought to rely on its RoT clause and had asked the administrator to deliver up or identify the goods.

Points to consider

In light of this decision, suppliers should:

  • ensure their RoT clause is incorporated into the contract (Isher successfully did this but it is often an issue in this type of case)
  • check their standard terms and conditions to make sure that not only is title to goods retained until payment is made in full but, on insolvency, there is an automatic trigger obliging a customer to immediately identify any remaining stock and provide possession of it
  • if a customer becomes insolvent, immediately:

a.check the contract and establish their rights; and

b.write to the administrator/liquidator expressly pointing out the RoT clause making it clear that they intend to rely on their rights. The administrator/liquidator should be asked to immediately identify and secure any remaining stock. If possible (and practical), consider visiting the insolvent company's premises to identify the stock.