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The Death of RoT Clauses: Substantiated or Unjustified?

Written by Lynette Ong for Commercial Law.




A look into the effectiveness of retention of title (RoT) clauses and how it is reflected within courts.


Introduction 

Since its inception, retention of title (RoT) clauses have proved to be ineffective at protecting the unsecured creditor, culminating in assertions that such clauses are ‘effectively dead and buried’. 


This article seeks to substantiate this contention by determining the effectiveness of RoT clauses. Ultimately, I argue that while newer cases demonstrate a greater extent of protection over the unpaid seller, RoT clauses remain largely ineffective. This is due to two main reasons – the many principles developed to invalidate such clauses and the judiciary’s case-by-case approach. Thus, while these clauses confer some protection on unsecured creditors, the prerequisites for protection are so stringent such that it essentially renders the clause null in reality. 


RoT Clauses and its Rationale 

RoT clauses arose from the case of Aluminium Industrie Vaaseen BV v Romalpa Aluminium Ltd [1976]. Here, the Court affirmed that RoT clauses entitle the seller to unpaid goods within the buyer’s possession. Crucially, such clauses create a ‘queue-jumping’ mechanism for sellers in seizing the buyer’s assets in cases of buyer’s insolvency. 


RoT clauses are divided into four types: Simple clauses entitle the seller to unchanged goods within the buyer’s possession. All-Monies clauses entitle the seller to all their identifiable goods until the buyer’s debts are extinguished. A Proceeds clause entitles the seller to the proceeds of sub-sales. Lastly, Mixed Goods clauses entitle the seller to their goods that have undergone a manufacturing process or are stored with other goods. 


The Effectiveness of RoT Clauses 

The existing academic consensus holds that RoT clauses are effective insofar as they concern Simple and All-Monies clauses. However, Proceeds and Mixed Goods clauses are problematic as they are likened to a charge registrable under Part 25, Companies Act 2006, and can be void for non-registration.  


I agree with the consensus in noting the widespread enforceability of Simple and All-Monies clauses. For example, Romalpa and Clough Mill Ltd v Geoffrey Martin [1984] establish the validity of Simple clauses. Similarly, the efficacy of All-Monies clauses was affirmed by the Court of Appeal and the House of Lords. Additionally, the consensus correctly appreciates the general unenforceability of Proceeds and Mixed Goods clauses, as evidenced in several cases. 


Nonetheless, I contend that Proceeds and Mixed Goods clauses are more effective than generally perceived.  Firstly, such clauses are not completely ruled out. In Clough Mill, the Court does not immediately strike down a Mixed Goods clause, despite expressing difficulty in ruling on them. Further, recent cases have upheld Mixed Goods and Proceeds clauses notwithstanding the past trend of striking them down. The Court’s newfound leniency indicates a shift in judicial attitude – further allaying concerns regarding its effectiveness. 


However, I overall argue that these clauses are ineffective. The consistent line of caselaw demonstrating their unenforceability suggest that the cases aforementioned are anomalies, rather than evidence of a new judicial attitude. This is supported by the Court in PST Energy 7 Shipping LLC v OW Bunker Malta Ltd. in noting that FG Wilson merited ‘further consideration’, suggesting that they disapprove of a more lenient approach. 


Further, inefficacy stems from the various judicial principles propounded to invalidate RoT clauses. Re Andrabell ruled that where there lacks express acknowledgement of a fiduciary relationship and no obligation to keep proceeds from sub-sales separate, there is no RoT clause. Similarly, these clauses are invalidated where extensive rights are conferred on the buyer or where the goods lose their original identity. Considering this, I agree that the Courts ‘tightened’ the requirements to establish a RoT clause. Accordingly, such clauses are inefficacious as they can potentially fail on so many grounds. 


Such ineffectiveness is also attributed to the judiciary’s case-by-case approach. In Re Bond Worth, the Court stated that each case had to be ‘decided on its particular facts’. I concede that this may enhance the effectiveness of RoT clauses. For example, in CKE Engineering, the Court upheld a Mixed Goods clause although the goods were intermixed to the extent that the seller’s contribution was no longer identifiable. Notably, the judiciary previously found no RoT clause where goods lost their original identity. However, the present Court still divided the mass in proportion to the seller’s contribution as this was intended by the parties. Thus, a case-by-case approach can enhance effectiveness. 


Nevertheless, I assert that this approach elicits inconsistency. In Compaq, the contract included provisions to ensure that a Proceeds clause would not breach any of the principles listed above. Nonetheless, the Court held that this constituted a charge. This suggests that the Court’s approach is arbitrary as it does not correspond with precedent.  A recent case further supports this in invalidating an All-Monies clause. This is especially significant as such clauses were consistently upheld in the past. While this case is unique as the Court invalidated the clause on the basis that it concerned revolving stock, it shows how a case-by-case approach leads to unforeseeable rulings. Comparatively, there is evidence that countries utilising a unitary system engender a consistency that enhances efficacy. 


Conclusion 

Despite recent judicial treatment, RoT clauses in the UK are largely ineffective due to the various principles available to invalidate such clauses and the Court’s case-by-case approach. Thus, the assertion that RoT clauses are ‘effectively dead and buried’, albeit harsh, goes some way in reflecting the efficacy of these clauses. 



Bibliography 

Cases: 

  • Aluminium Industrie Vaaseen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676

  • Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339

  • Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25

  • Bulbinder Singh Sandhu (t/a Isher Fashions UK) v Jet Star Retail Limited)(In Administration) [2011] EWCA Civ 459

  • Clough Mill Ltd v Geoffrey Martin [1984] 3 All ER 982; [1985] 1 WLR 111

  • Compaq Computer Ltd v Abercorn Group Ltd & Ors. [1991] BCC 484

  • FG Wilson (Engineering) Ltd v John Holt & Co. (Liverpool) Ltd [2012] EWHC 2477 (Comm)

  • In the Matter of CKE Engineering Ltd (In Administration) [2007] BCC 975

  • PST Energy 7 Shipping LLC v OW Bunker Malta Ltd. [2016] UKSC 23

  • Re Andrabell [1984] 3 All ER 407

  • Re Bond Worth Ltd [1980] Ch 228 

  • Tatung (UK) Ltd. v Galex Telesure Ltd. & Ors (1989) 5 BCC 325 


Statutes: 

  • Companies Act 2006 


Journals: 

  • Davies W., ‘Romalpa thirty years on – still an enigma?’ (2006) 4(2) Hert.L.J. 2

  • De Lacy J., ‘Reservation of Title and Charges on Company Book Debts: The Death of Romalpa?’ [1991] 54 MLR 736

  • De Lacy J., ‘Romalpa revalued?’ [1993] Conv. 375 

  • Herington M. and Kessel C., ‘Retention of title in English Law’ (1994) 5(10) ICCLR 335

  • Hicks A., ‘Retention of Title – latest developments[1992] JBL 398

  • Johnson R., ‘A Uniform Solution to Common Law Confusion: Retention of Title Under English and US Law’ (1994) 12(1) Berkeley Journal of International Law 99

  • Mitchell J., ‘Retention of Title Clauses: A Key to the Romalpa Maze’ (2016) 4 Legal Issues 77


Others: 

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