The Retention of Title clause explained and how the Romalpa Clause can help construction businesses

(01/09/2010)

When a company goes under it can have serious repercussions for its suppliers and all the affiliated businesses. Whilst the construction industry is not alone in experiencing the grim reality of insolvency, in today’s economic climate cash flow is definitely king, so it is important for those involved in the trade to consider how best to protect themselves from the inevitable problems that can arise in times of economic cutbacks. Even if your calendar is fully booked or your products and services are in demand, you cannot afford to ignore the effect of insolvency.

Hopefully you are already taking steps to minimise any risk by checking the purchaser’s creditworthiness, instigating credit insurance (if possible) and ensuring strict terms and conditions with reference to payment. In addition to these practical precautions, you might also wish to consider including a Retention of Title clause (ROT), which can trace its origins to the 19th century ‘Reservation of Title’. In a nutshell, ROT takes the form of the provision that is made in a contract of sale stating that the title to the goods remains with the seller until paid for.

Research shows that the concept of Reservation of Title has been present in English law since the late 19th century when it was first mentioned in McEntire v Crossley [1895] AC 457l, which was at the time a celebrated House of Lords decision. The clause is now commonly referred to as the Romalpa Clause because of a dispute in the 1970s between a Dutch company, Aluminium Industrie Vaassen and the British company Romalpa Aluminium (Aluminium Industrie Vaassen B.V. v. Romalpa Aluminium [1976] 1 W.L.R. 676). The case was significant because it introduced the concept of ‘extended reservation of title’ into English law. Whilst the principles that were originally laid down have been diluted in the latter half of the 20th century, it nevertheless continues to impact on commercial law today.

When Romalpa became insolvent and went into liquidation after receiving large quantities of aluminium foil which they were unable to pay their Dutch suppliers for, the company invoked Clause 13 in their contract which stated that: “The ownership of the material to be delivered by A.I.V. will only be transferred to the purchaser when he has met all that is owing to A.I.V., no matter on what grounds.”

As a significant quantity of the foil remained untouched and still in Romalpa’s possession, Aluminium Industrie Vaassen successfully argued that its Clause 13 enabled it to take back what it had originally sold. The action was successful and the Court held that “The plaintiffs were entitled to trace the proceeds of sale of the unmixed foil and to recover them in priority to the secured and unsecured creditor.”

Those who work in construction are often involved in a complex chain of supply with different suppliers, customers and contractors. This means that goods may have passed to many buyers before the original seller encounters a problem which often makes it difficult to determine who actually owns the goods. Not only that, but ownership often passes at quite an early stage, before goods are paid for, complicating the situation still further.

As a rule of thumb, unless otherwise stated in a contract for the sale of goods, the title passes from the seller to the purchaser when the parties intend it to pass (section 17 Sale of Goods Act 1979), which is normally upon delivery. However, many construction contracts are for the supply of labour and materials and hence, are governed by the Supply of Goods and Services Act 1982, under which title again passes when the parties intend it to pass.

To complicate matters still further, there are many types of Romalpa Clause, including:
- Simple or reservation of title clauses
- Debt clauses
- Charge clauses
- Mixed or processed clauses

Simple or reservation of title clauses aim to preserve the seller’s title to the unpaid goods: “Until the purchase price is paid in full, title of the goods remains with the seller.” However, insolvency practitioners could claim that the goods, if remaining on the premises, have been paid for, whilst those goods already shipped out are the subject of the seller’s claims. To avoid this, the seller should have a unique identification mark on the goods.

A debt clause such as “Until the price and all other sums owing by the purchaser to the seller are paid in full, title in the goods remains with the seller", is known as an ‘all money clause’, and such clauses have received approval from the courts. There is no need for the seller to identify the goods, as they remain the owner if any debt owed to them by the purchaser is unpaid.

Charge clauses will generally fail: "Until the price is paid in full, the seller remains owner of the goods and any proceeds of their sale.” This is because the courts consider such clauses create a form of charge or security over the goods, This must be formally registered at Companies House within 21 days of the creation of the charge, which is at the time of each and every delivery.

Mixed or processed goods clauses are rarely effective in court: "The seller shall have ownership of the whole of the goods until payment is made in full where the goods are mixed with or incorporated in other goods before the price is paid". This is where goods that have been supplied have been incorporated into a larger component or fixed to premises, and hence cannot easily be separated.

So, the Romalpa Clause in all its different forms offers significant protection to a vulnerable seller. However, in order to be of any use, it does need to be written into the contract in the first place! A seller cannot reclaim its goods simply because it has not received payment, even if the goods have not been sold on or used. Therefore, it is critical that you incorporate the clause into your standard terms of sale for it to be effective.

Subject to certain criteria being met, the courts will uphold a valid Romalpa Clause providing it can be demonstrated that an agreement has been properly made between the seller and purchaser. In other words, there must be a clear offer and acceptance, with no counter-offer made prior to performance, including where the purchaser has acknowledged the order, but then refers to its own terms and conditions; . Some companies still continue to print payment terms on its invoice, including ROT clauses, but this is ineffective where the goods have already been supplied.

So, despite the fact that the Retention of Title clause has its origins back in the 19th century, in its more modern form it remains distinctly relevant to the problems that many in the construction industry face today. As no one can afford to take the profitability of their business for granted, it makes sense to do all you can to safeguard against being affected by the adversity of others. The Romalpa Clause offers some much needed protection to all in a climate of uncertainty and economic vulnerability.

Related categories:  Standards and Legislation