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Commercial law 1 assessed essay

Commercial Law 1 Assessed Essay

S Co wishes to sell widgets to B Co. B Co uses widgets in its manufacturing process and also sometimes, itself, sells widgets. S Co is concerned that it will have to make the sale to B Co on credit and that B Co’s financial position is not very strong. S Co has been advised that it can protect itself from B Co becoming insolvent before it pays for the widgets by means of a retention of title clause provided that it requires B to store the widgets it, S Co, supplies separately from those from other sources.

Advise S Co as to the extent to which that advice is sound.

This essay is concerned with what protection the law provides for a seller where a buyer becomes insolvent. It is section 19 (1) of the Sales of Goods Act 1979 that lays a varied foundation for protection for the buyer by means of fulfilling certain obligations. In sum it provides that if there is a contract for the sale of either specific goods or goods that are subsequently appropriated to the contract, the property in the goods[1] will not pass to the buyer until certain conditions imposed by the seller are fulfilled.

Usually the common condition that must be fulfilled it that of full payment and it is only then that property will pass. In this case scenario it seems fairly ambiguous as to what conditions must be fulfilled. It seems the storing of the widgets S Co supplies separately from other sources B Co owns, acts as the only condition, as no mention of full payment has been made, but there is however an assumption on the basis that B co is purchasing the widgets on credit and they may not make full payment due to their weak financial position.

The starting point with regard to ‘retention of title’ clauses is the case of Romalpa.[2]

It is a case that plays a protagonist role in the understanding of retention of title clauses and seems to have appropriately renamed them, ‘Romalpa clauses’. The case itself seems to portray a very liberal approach to the respect given to clauses, however following case law provides for a more stringent approach to the viability of clauses. From the outset it does seem that this area of law is a little confused and has been described as ‘a maze if not a minefield’[3] as each clause is taken in a very subjective manner, and as we will see in later case law the outcome to whether it works is often uncertain.

The facts of Romalpa show that a Dutch company supplied foil to a UK company, on terms that the foil remained S’s property until B had paid all debts due to S[4]. Until then, B was required to store the foil separately from its own property. The case went further where although B was allowed to manufacture products using the unpaid foil the products were to be transferred to S ‘as surety’. Further if any of these products were resold to a third party S would have the right to receive payment. Three types of subject matter were established here in relation to the clause, these are,

(i)                 right to the original, unused, goods themselves

(ii)               right to manufactured goods from the original items

(iii)             And right to the proceeds of any resold manufactured or original goods to third parties.

In this essay scenario we are concerned with both the right that S Co has to the unused original goods and as B Co manufactures widgets also the items that they produce in their process. Although there is no mention that B Co will resell the original goods without paying it will always be a possibility, so worth mentioning.

So firstly let us look at the right that S co has to the original, unused goods. It is in the case of Clough Mill Ltd v Geoffrey Martin where the rule was clearly established, that a simple retention of title clause, reserving the right to the original and unused goods will be effective. In the case itself the sellers supplied yarn to the buyers who intended to use it for the manufacture of cloth. The sellers tried to incorporate into the contract a retention of title clause that included a multitude of conditions. It was held that the case covered two separate matters; the first was that a simple retention of title clause would be effective over the unused an original goods, and secondly that the clause would not be effective when trying to retain newly created goods from the original goods.

This however was only at first instance[5], it was said that the effect of the clause was to create a charge in favour of the sellers, with the buyers having legal title.[6] It is important to note here that if in the instance of charge being created where it is a corporate buyer such as S co, the charge must be registered otherwise it will be void against a liquidator or creditor of the company.[7]This argument of creating a charge was rejected when sent to the Court of Appeal[8], and the seller succeeded in retaining title of a proprietary interest in the newly created goods.

The case itself seemed to unsettle the steady law of Romalpa, and although the basic rule that a simple retention of title clause works where the goods are original and unused until full payment is made, it is still necessary for the seller to be able to identify their goods from that of the buyers.

The idea of identification is key to solving S Co’s problem if B Co were to become insolvent. Due to the fact that B is supposedly storing S Co’s widgets separately from his own, you would assume that they would not be mixed up. However as in the case of Clough, there is an assumption that the widgets will probably be used in the manufacturing process and the widgets will inevitably be mixed together. As after all not every company is fully organised. Before moving on to the rights that S Co will have to the goods manufactured out of the original goods, it would be a safe bet to say that S Co could retain title to the original goods, but only if the goods were unused, and clearly identifiable.

The case law on identification is rather intricate but proves to highlight significant points. Firstly if the original goods have entered into a manufacturing process the seller’s right to retention of title of the original goods will be extinguished.[9] The same approach was adopted in the case of Borden (UK)[10] where the original resin was irreversibly mixed in with wood chips when making chipboard. Once again the seller’s right to retention of title of the original goods diminished. In the case of Hendy Lennox[11] however, even though the original goods (engines) were mixed in the manufacturing process, they could still be detached and used successfully without being damaged and the seller could retain title. So in S Co’s case it is important that the hypothetical widgets in question do not get damaged or irreversibly mixed, otherwise retention of title will not be secured.

In this case scenario S Co and B Co use exactly the same goods. This inevitably will cause even more problems when storing the items, even though S Co has expressly mentioned that storage should be separate. It is McCormack[12] who uses the example of similar wine bottles being mixed unilaterally together in a warehouse. In this instance the law is unclear, however the modern approach is that the seller and buyer become ‘tenants in common’. In which case the innocent party is entitled to recover a ‘quantity equivalent to his input’.[13] The party does however have to prove that his goods are ‘still in it’[14]; this may prove difficult where several deliveries are made over a period of time. If in the essay scenario B Co does not act in the proper fashion by storing the widgets separately, his wrongdoing should allow S Co to recover the widgets without proving any of the above criteria mentioned in case law.

So it seems so far that S Co will be able to recover the original goods, that are unused if they are identifiable. However if the original widgets have been used or consumed in the manufacturing process, no retention of title for the seller will stand. With regards to claims of manufactured products the courts have applied a simple ‘windfall profit’[15] logic where a manufactured product involves considerable labour, cost and other components, and to allow the seller right to the product would simply be wrong. So quite clearly S Co would not have the right to any of B Co’s finished manufactured products, only a charge could be related back to S Co for the payment of the sum for the original widgets.

Finally in the case scenario it says sometimes B Co will sell the widgets itself, in which case it is necessary to consider the possibility that it will sell S Co’s original widgets to a third party without full payment to S Co. It is important to note here that third parties will usually rely on s25 of the Sale of Goods Act and acquire good title to the goods. The goods however, have to be taken bona fide and with notice to the rights of the original seller. In which case S Co’s retention of title will be lost. It is therefore necessary to consider the rights that S Co has to the resale of the goods and possible claims to proceeds.

It was in the case of Romalpa again where the retention of title to the proceeds of a resale as his own goods succeeded. In the case it was anticipated that the buyer would sell on the original foil to a sub-buyer, and in which case the original seller could claim the proceeds of the sale as his goods.

What needs to be established is a fiduciary relationship where the buyer acts as a bailee or an agent for the seller and all the proceeds will be given to the seller, or kept in a separate account by the buyer. In the widget scenario there is the possibility that B Co could resell the original widgets without paying S Co, so perhaps S Co could rely on the precedent of Romalpa and this idea of a fiduciary relationship. However before thinking bluntly that this is correct it is necessary to consider the case of Compaq Computers Ltd v Abercorn Group Ltd[16] which is in complete contrast to Romalpa.

In the case the seller made it clear that the buyer would act as the agent for the seller, and would store the goods, make account of all profit, and keep the profit in a separate bank account. All this made absolutely no difference to the retention of title in the proceeds of the resale of the original goods. It was merely held that a charge be made over the proceeds of the sale to the original goods! So it seems even an express term in the contract, or a multitude of conditions will still not benefit the seller when trying to retain title in the resale of the original goods.

Conclusion

In the widget case scenario it questions whether a retention of title clause provides protection where a buyer (B Co) buys on credit some widgets that he stores separate from his own. What needs to be clarified in this situation are all the eventualities that might occur once B Co has received the widgets. B Co will have the idea that even though property has not passed the widgets belong to him and they will proceed to do what they like with them.

It seems fair to say that by using a simple retention of title clause indeed S Co may be able to retain title in the original, unused widgets, providing they can be identified. Also it is a possibility the S Co may recover the widgets in the manufacturing process or newly created goods if they are not damaged, an again can be identified. However it is very unlikely that S Co will succeed in retaining title in the resale of the original goods to a third party. Although the liberal precedent of Romalpa exists for simple retention of title clauses, it does not supply a solid argument for retention of title of the resale of goods.

Bibliography

ü  Commercial Law, Robert Bradgate, 3rd Edition, 2000

ü  Commercial Law, Margaret & Ivor Griffiths, 2nd Edition, 2001

ü  University of London External Programme, E.G.Mckendrick, 3rd Edition, 1999

ü  Retention of title clauses in Sale of Goods Contracts in Europe, Iwan Davies, 1999


[1] By s 17 of the Sale of Goods Act, the passing of property from seller to buyer depends on the intention of the parties.

[2] Aluminium Industrie v Romalpa Aluminium [1976] 1 WLR 676

[3] Per Staughton J in Hendy Lennox Ltd v Grahame Puttick Engines Ltd [1984] 2 All ER 152 [1984] 1 WLR 485

[4] This is known as an ‘all monies’ clause.

[5] [1984] 1 All ER 721

[6] The idea of a charge being created was also reaffirmed in Re Bond Worth Ltd [1979] 3 All ER 919

[7] Companies Act 1985, s395

[8] [1984] 3 All ER 982

[9] Model Board Ltd v Outerbox Ltd [1993] BCLC 623, where the original cardboard was made into boxes and printed on.

[10] Borden (UK) Ltd v Scottish Timber Products Ltd, [1979] 3 All ER 961

[11] (Industrial Engines) Ltd v Grahame Puttick Ltd, [1984] 2 All ER 152

[12] McCormack (1990) 10 Legal Studies 293

[13] Indian Oil Corpn v Greenstone Shipping SA [1988] QB 345

[14] Ian Chisholm Textiles Ltd v Griffith [1994] BCC 96

[15] Robert Bradgate 2000, p456, 18.4.4 Claims to manufactured products.

[16] [1991] BCC 484



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