Retention of title claim is dismissed

ANDREW FLEMING of Blocks Solicitors warns that a Retention of Title (ROT) clause may prove to be of limited value under some circumstances

AN INTERESTING recent case, that of Sandhu v Jet Star Retail Limited, which reached the Court of Appeal, considered the position of a creditor of a company in administration who had the benefit of a retention of title over goods supplied to the company.

A retention of title clause (ROT) is a term successfully incorporated in a contract for sale which, in effect, gives the seller of goods priority over other creditors, particularly in the event of the insolvency of the buyer.

This is because ownership in the goods does not pass to the buyer until full payment has been received for them by the seller.

In this case, the seller supplied goods under a contract which said that, if the buyer became insolvent, the seller could, by giving notice, prevent the buyer from selling or disposing of the goods supplied which had not been fully paid for.

However, when the buyer went into administration, no notice was served by the seller and, with the blessing of the administrator, the buyer sold the goods to a third party.

The seller was understandably annoyed and brought proceedings on the basis that the goods were his and the administrator was wrongly interfering with his title in the goods, which should only have been sold in the ordinary course of business.

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However, it was found by the court, on the construction of the ROT, that since notice had to be given to prevent the buyer from selling elsewhere, there was an implied understanding that the buyer might be permitted to continue to sell the goods after insolvency, in the absence of such notice being given.

The seller, therefore, had no rights other than as an unsecured creditor, the court decided.

The outcome of this case highlights the importance of, firstly, having a comprehensive and appropriate ROT for one’s business.

Had, for instance, the clause made it clear that unpaid goods could only be disposed of in the ordinary course of business, the applicant might well have won the day.

Secondly,the result highlights the importance of keeping a tight rein on one’s credit lines.

Although an ROT can be extremely useful, the credit position of customers does need to be constantly monitored and the appropriate action taken when and if there are tell-tale signs of cash flow problems, such as unpaid invoices or unanswered telephone calls.