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VISITING AN OLD FRIEND — THE “ROMALPA” CLAUSE
INTRODUCTION
“A man’s creditworthiness is as good as his name.” So goes the old adage.
While many businesses are still willing to grant credit based on the
reputation of and previous dealings with their trading partners, the
development of modern trade practices makes it less attractive to do so.
The introduction of the concept of limited liability and the legal rules
which give preference to creditors with security over corporate assets have
made parties selling goods wary of extending credit too freely. In the
competitive market of today, however, refusal to trade on credit terms
may adversely affect a business. Innovative contractual devices have thus
been thought up to deal with the concerns of sellers. One of these which
is now frequently employed by goods suppliers is the “Romalpa clause”.
It has been twenty years or so since such clauses were first considered by
the courts in the case of Aluminium Industrie Vaasen B.V. v Romalpa
Aluminium Ltd1 (“Romalpa”). There have been some interesting
developments relating to the extent to which such clauses may be used as
a security device giving rise to much judicial and academic comment on
the matter. This paper pays a visit to this old friend to see how it is getting
on. We shall first look back at its birth and then briefly reacquaint ourselves
with its development through the years. We will also examine the chief
legal and practical issues associated with the use of such clauses and suggest
how these problems may be addressed. The debate surrounding “current
account” Romalpa clauses will also be highlighted in the discussion. Finally,
we shall look at the future of Romalpa clauses in the light of proposals for
reform of the law concerning its use as a security device.
GETTING REACQUAINTED
As was alluded to earlier, the Romalpa clause obtained its name after the
English case of Aluminium Industrie Vaasen B.V. v Romalpa Aluminium
Ltd2. The clause is also often referred to as a “reservation of title” or
“retention of title” clause. Its essence is to reserve the property in the
goods to the seller until he has been paid in full, notwithstanding that the
goods may have been delivered to the buyer. The purpose of such an
arrangement is to confer upon the seller the right to reclaim possession of
his goods should the buyer become insolvent before paying the seller for
the goods.3 Such clauses are necessary because under the law relating to
1
2
3
[1976] 1 WLR 676
Ibid.
P S Atiyah, The Sale of Goods (9th ed 1995), at 419; G McCormack, Reservation of Title
(2nd ed 1995), at 2.
9 S.Ac.L.J.
Visiting an Old Friend — The “Romalpa” Clause
251
the sale of goods, ownership or title in goods generally passes at the latest
on delivery in the absence of any express agreement to the contrary.4 If the
buyer owned the goods when he became insolvent, a creditor holding a
floating charge over the relevant assets would generally have priority to
the goods as against the unsecured seller. This would put the vendor who
sells goods on credit at a severe disadvantage. Inserting a Romalpa clause
into the contract of sale would prevent the buyer’s secured creditors from
having any rights over the goods as, until the seller receives payment, the
goods sold do not form part of the buyer’s pool of assets. To further
enhance their position, sellers have attempted to have the clause extended
to cover the reservation of title to any end products, (into which the relevant
goods have been incorporated), to themselves until they have been paid
for the goods. Some clauses go further and require that all indebtedness
from the buyer to the seller be discharged before title in the goods passes
to the buyer.5
Since Romalpa in 1976, reservation of title clauses have become more
commonly incorporated into supply agreements. Goode, in commenting
on the case, stated that “it is doubtful whether any other case decided this
century has created a greater impact on the commercial law”.6 Currently,
many different versions are in use, some of which are of considerable
complexity. Indeed, the law relating to Romalpa clauses has developed
with such intricacy that it has been described as “a maze if not a minefield”.7
An overview of the leading cases
The notion of reserving ownership of goods supplied as a form of security
for payment for goods was, in itself, not a new concept to English law at
the time Romalpa was decided.8 There had been recognition in cases prior
to Romalpa that contracts could and did provide for retention of title until
payment.9 The basis for retention of title clauses arises from the common
law principle that, in contracts for the sale of specific or ascertained goods,
property in the goods passes when the parties intend it to pass. This was
subsequently incorporated into section 17 of the UK Sale of Goods Act
1979 which Singapore has adopted as the Sale of Goods Act (cap 393)
pursuant to the Application of English Law Act (cap 7A). However,
4
5
6
7
8
9
This is the cumulative effect of ss 16 to 18 of the Sale of Goods Act (cap 393).
Such clauses are referred to as “current account”, “all sums” or “all moneys” clauses. See
B Collier, “Romalpa Clauses: Reservation of Title in Sale of Goods Transactions” (1989),
at 1; McCormack, supra, note 3, at 77.
The Times, May 11, 1977.
Per Straughten J in Henry Lennox Ltd v Grahame Puttick Ltd [1984] 1 WLR 485 at 493.
See the Report of the Review Committee on Insolvency Law and Practice in UK (“the
Cork Committee Report”), June 1982 Cmnd 8558, at paragraph 1599.
For example, Thomas v Ingtis (1885) 7 OR 588; V Ward Ltd v Bignall [1967] 1 QB 534
at 545 per Diplock J; Lacis v Cashmarts [1969] 1 QB 400 at 407 per Lord Parker CJ.
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litigation on the effect of such a clause was rare and it was not until the
clause was taken a stage further in Romalpa where the sellers attempted
to reserve the property in goods until all that was owing to them had been
paid that it became the subject of much judicial and academic discussion10.
The decision resulted in a greater appreciation of the potential scope for
the use of such clauses and the impact that this would have in cases of
insolvency.11
Romalpa
The case involved the sale of aluminium foil from a Dutch supplier (AIV)
to an English company (Romalpa). Romalpa was placed under receivership
and at that time AIV was owed £122,239. It was certified by the receiver
that he held £35,152 representing the sale proceeds of aluminium foil
supplied by AIV. AIV claimed that they were entitled to this sum in priority
to the secured creditors as well as against all other unsecured creditors. In
addition, they claimed to be entitled to a quantity of aluminium foil valued
at £50,235 which was certified to have been supplied by them and held by
Romalpa. AIV relied on a standard clause in their Dutch supply contract
which, translated, provided inter alia that “the ownership of the material
to be delivered by AIV will only be transferred to the purchaser when he
has met all that is owing to AIV...”. In addition, the clause had several
other salient features. It provided that if the purchaser made a new object
with the foil or mixed the material with other objects or if the material
became a constituent of another product, ownership in the items which
contained the aluminium supplied would be the property of AIV until full
payment was received. Until such time Romalpa was to have possession of
these items as fiduciary owner. Romalpa was however free to sell these
items subject to the proceeds of such sale being made available to AIV on
request so long as the debt to AIV remained undischarged.
It was conceded by Romalpa that the foil in the possession of the receivers
was held by them as bailees for AIV so long as they had not paid AIV for
the foil pursuant to the contract. The court thus held that the title to those
goods continued to remain with AIV until the debt had been discharged.
The main issue which needed to be resolved was that concerning the
proceeds from the sale of the un-mixed foil. While the clause dealt with
the proceeds of sale of mixed foil to sub-purchasers, it was silent in relation
to proceeds from the sale of un-mixed foil. At first instance, Mocatta J
gave judgement in favour of AIV on the grounds that on the facts, the
intention was to create a fiduciary relationship between the parties thus
10 See K Sutton, “Sales and Consumer Law in Australia and New Zealand” (1983), at 269.
11 The Cork Committee Report, supra note 8, at paragraph 1599.
9 S.Ac.L.J.
Visiting an Old Friend — The “Romalpa” Clause
253
enabling AIV to recover the proceeds of sale of the un-mixed foil under
the principle of Re Hallett’s Estate12 and the equitable remedy of tracing.13
The decision was upheld by the Court of Appeal. Roskill L.J agreed with
the first instance judgement. He rejected the argument put forward by
counsel for Romalpa that to find a fiduciary relationship between the parties
would be against business efficacy. Counsel’s argument was that such a
finding would require Romalpa to hold proceeds of sale of foil to subpurchasers on trust for AIV and prevent Romalpa from using such proceeds
for any purpose save for paying AIV. This would cause severe cash flow
problems for Romalpa. The learned judge disagreed and formed the view
that the obvious purpose of the clause was to place on the buyer the
obligation to account for the proceeds in accordance with the normal
fiduciary relationship of principal and agent, bailor and bailee.14
The decision in Romalpa is significant in that it permitted a seller of goods,
by contractually retaining title to the goods sold, to create an interest in
the goods such that he is entitled not only to the goods themselves, but
also to the proceeds arising from the sale of those goods. At first instance,
it was argued that this in effect amounted to the creating of a charge over
the goods which was registrable under s 95 of the Companies Act 1948.15
This argument was rejected on the grounds that only charges over the
property of the company were registrable under the provisions and since
property in the goods remained with the seller, no registrable charge was
created.16 It is submitted that Mocatta J in so finding failed to distinguish
between the goods in question and the sale proceeds of the said goods. It
was obvious that if the proceeds had actually exceeded the sums due to
AIV that nobody intended for them to keep the excess. Since AIV were
only entitled to the proceeds of sale insofar as they were necessary to pay
off what was owed to them, the Court of Appeal’s conclusion that all the
money received was to be held on trust for AIV should have involved a
recognition that the arrangement in fact amounted to a registrable charge.17
Such, however, was not the outcome, possibly because the point was not
re-asserted in the Court of Appeal. This unsatisfactory position of Romalpa
resulted in several subsequent cases seeking to limit the case to its special
facts.18
12
13
14
15
16
17
18
(1880) 13 Ch D 696.
[1976] 1 WLR 678–683.
Ibid, at 689, 690.
The equivalent of s 131 of the Singapore Companies Act (cap 50).
Ibid, at 680.
Atiyah, supra note 3, at 458 459.
John de Lacy, “Reservation of title and charges on company book debts: The death of
Romalpa?” (1991) 54 Modern Law Review 731. Chalmers, “”Romalpa” Retention of
Title Clauses”, (1986) 60 ALJ 545, at 548. See also Tatung (UK) Ltd v Galex Telesure Ltd
& Ors, (1989) 5 BCC 325, at 330–332; Model board Ltd v Outer Box Ltd, [1993] BCLC
623, at 628; and Compaq Computer Ltd v Abercon Group Ltd, [1993] BCLC 602.
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Subsequent Cases
In Re Bond Worth Ltd19 , suppliers sold synthetic Acrilan fibre to Bond
Worth to be used in the latter’s carpet manufacturing business. Bond Worth
subsequently became insolvent and owed the suppliers over half a million
pounds. The insolvent company had substantial stocks of yarn and finished
carpets. The suppliers sought through a purported retention of title clause
to trace their fibre to the yarn and carpets and into the proceeds of sale
of the carpets. One crucial distinction between this case and Romalpa was
that in Bond Worth, the clause specifically sought to retain only “equitable
and beneficial” ownership and made no mention of the legal ownership of
the goods which was held to have passed on to the buyer.20 Slade J in
construing the relevant clause found that no bailor-bailee relationship was
created as the legal title to the fibre had been passed to the purchaser
whereas the essence of a bailment is that property in the goods remained
with the bailor.21 In addition, he held that because the clause failed to
restrict Bond Worth’s rights to deal freely with the goods, no principalagent relationship was created either.22 No fiduciary relationship came into
existence and the principle of tracing was held to be inapplicable.23 The
retention of equitable and beneficial ownership in the goods amounted to
the creation of an equitable charge over the goods in favour of the seller.
As the charge was not registered, it was of no avail to the seller.24 It can
be seen from the decision that the judge in Bond Worth was uncomfortable
with the intrusion of equitable principles of trust, fiduciary relationship
and tracing into contracts of sale.25
In Borden (UK) Ltd v Scottish Timber26 , the issue revolved around Borden
seeking to rely on a retention of title clause to trace resin into the chipboard
manufactured by Scottish Timber and ultimately into the proceeds from
the sale of the chipboard. Two facts were highly relevant to the case. First,
Borden had agreed in the contract for the resin supplied to be used in the
manufacture of the chipboard prior to it being paid for. Secondly, the
manufacturing process employed was irreversible and the resin once used
could not be recovered. The judges in the Court of Appeal unanimously
found that no fiduciary relationship was created. The significance of this
case, however, is in the finding of all three Lord Justices that once the
goods being the subject of a Romalpa clause become inextricably mixed
19
20
21
22
23
24
[1980] Ch 228, hereafter referred to as “Bond Worth”.
Ibid, at 245.
Ibid, at 247.
Ibid, at 257.
Ibid, at 263.
Ibid, at 268, 271. The impact of not registering a registrable charge over a company’s
assets in cases where the company faces insolvency will be discussed in greater detail
later in this paper.
25 Chalmers, supra note 18, at 548.
26 [1981] Ch 25, hereafter referred to as “Borden”.
9 S.Ac.L.J.
Visiting an Old Friend — The “Romalpa” Clause
255
with other material such that they can no longer be said to exist as they
were originally, the ownership of the seller in the said goods also comes to
an end and there is nothing which can be the subject matter of a tracing.27
It is observed, however, that the seller in this case did not purport to exert
ownership in the manufactured goods through the clause.
Such an assertion of ownership was contemplated in Re Peachdart Ltd28.
The seller here sought to trace leather supplied by them which had been
partly manufactured into handbags and claimed to be entitled to the
proceeds of sale of the handbags. The retention of title clause relied upon
by the sellers appears to have been drafted to incorporate what was thought
to be the principles established by the three earlier cases discussed above.
Condition 11 of the contract of sale made provision for the seller to exercise
some form of control over the goods as in Romalpa. It further made clear
that full ownership of the goods was to remain with the seller until the
price was paid in full and provided for the ownership of products made out
of the leather to vest in the seller. The clause went on to state that “the
relationship of the buyer to the seller shall be fiduciary in respect of the
products” and provided for the seller to “have the right to trace the proceeds
thereof according to the principles in In re Hallett’s Estate.”29
The sellers relied on Romalpa itself to assert the validity of the clause in
entitling them to the proceeds of sale of the handbags. They sought to
distinguish Borden on the grounds that there the resin lost its character
and no longer existed as such whereas in their case, the leather, which was
of very high quality, was still identifiable and was merely incorporated into
the finished product. Vinelott J rejected the seller’s submissions. He held
that Romalpa was inapplicable as there was no claim made in respect of
mixed goods in that case.30 Despite the language used in the contract, the
judge found that the intention must have been that the sellers should lose
their exclusive ownership in each piece of leather as soon as work on it was
commenced by the buyers. The judge found that where raw material was
sold to a manufacturing company, it was impossible to suppose that the
parties intended the seller to have the right to any article partly or
completely manufactured from it until the material had been paid for. The
decision appears to be based on the fact that the contract did not require
the buyers to pay proceeds from the sale of the handbags into a separate
account and thus a bailor-bailee relationship could not have been intended.31
The seller’s rights were thus in the nature of an unregistered charge and
could not be enforced.
27
28
29
30
31
Per Bridge LJ at 41; Per Templeman LJ at 44 and per Buckley LJ at 46.
[1984] 1 Ch 31, hereafter referred to as “Peachdart”.
Ibid, at 138.
Ibid, at 139.
Ibid, at 142.
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(1997)
This principle was reiterated in dough Mill Ltd v Martin32 which involved
the sale of yarn to be manufactured into fabric. There Robert Goff LJ
stated that “where A’s material is lawfully used by B to create new goods,
whether or not B incorporates other material of his own, the property in
the new goods will generally vest in B, at least where the goods are not
reducible to their original materials.”33 The principle stems from an area of
law relating to the creation of new products from materials owned by
another known as specificatio where the ownership of a new product
normally vests in its bona fide maker, subject to his liability in damages to
the owner of the materials converted.34 The assumption in these “mixedgoods” cases appeared to be that “the application of the manufacturing
process to the goods sold vested ownership of the products in the buyer
company so that the buyer company was creating a charge over its property
as security for payment of a debt.”35 It was, however, recognised in Clough
Mill that there was nothing to stop parties from agreeing that property in
any new product created by manufacture is to vest in the seller.36 An
appropriately worded arrangement could make it such that the property in
the new product would vest in the seller the moment it came into existence.
The result would be that no interest is conferred on the seller by the buyer
as the latter never owned the property and the arrangement would not be
construed as an unregistered charge over the buyer’s property.
It is, however, clear that a reservation of title clause may be effective
where the goods sold retain their identity even after being incorporated by
process of manufacture into a finished product.37 This was emphasised in
the dicta of Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick
Ltd.38 Here, property in diesel engines sold, subject to a reservation of title
clause, were held not to have been transferred by virtue of their being
incorporated into generators.39 The engines could be identified by their
serial number and evidence was given that they could be removed within
several hours without changing their character in any way.
The opportunity for the House of Lords to consider the validity and effect
of Romalpa clauses arose only in 1990 in the case of Armour v Thyssen
32
33
34
35
36
37
38
[1985] 1 WLR 111, hereafter referred to as “Clough Mill”.
Ibid, at 119. Also per Donaldson MR at 125.
See Benjamin J, Sale of Goods (4th ed 1992), at paragraph 5–121, note 33.
Ibid, at paragraph 5–122.
Per Goff LJ at 119 and per Oliver LJ at 124. Cf comments by Donaldson MR at 125.
Benjamin, supra, n 34, at paragraph 5–121.
[1984] 1 WLR 485, hereafter referred to as “Hendy Lennox”. The dicta was subsequently
confirmed in Clough Mill, supra n 32.
39 The decision was approved and applied in Gebtyeder Buehler Ag v Peter Chi Man
Kwong & Ors [1987] 1 MLJ 359. Cf Specialist Plant Services Ltd v Braithwaite Ltd (1987)
3 BCC 119 for situations where the materials were incorporated as part of a process for
repairing another product.
9 S.Ac.L.J.
Visiting an Old Friend — The “Romalpa” Clause
257
Edelstahlwerke AG.40 The case involved the supply of steel strip by the
sellers under a retention of title clause. The House of Lords, without going
into much detail, upheld the validity of the clause. They further concluded
that so long as property in the goods in question did not pass to the buyers,
such clauses did not create a charge over the property which would
otherwise be registrable under the relevant provisions of the Companies
Act.41
A RECURRING AILMENT
Throughout its development, the “Romalpa” clause has won widespread
support from goods suppliers for its use and can now be found in even the
simplest of supply contracts. Even the international community has endorsed
its use with the Council of Europe drafting a convention recognising the
validity of simple reservation of title clauses.42 Although such clauses are
now commonplace in commercial transactions, it is often difficult to predict
the effectiveness of any particular clause due to the many qualifications
associated with its use.43 The impact of each clause is dependent on the
wording of the particular clause and the circumstances surrounding the
facts and the contract to which it is sought to be applied.44 As brought out
by the cases, a major obstacle which may impede the effectiveness of such
a clause is that relating to whether or not the clause in effect creates a
registrable security interest when used against a company.
In cases where retention of title clauses are disputed, there is invariably
the argument raised that the clause constitutes a charge against the property
of the corporate buyer. Company law in most common law jurisdictions
has a system of registration of charges so as to establish a scheme whereby
parties who wish to take security over corporate assets may have notice of
other security interests in the assets45 . In addition, the legislation provides
for a priority arrangement between concerned parties regarding the assets
of the company should the company become insolvent.46
40 [1990] 3 All ER 481, hereafter referred to as “Armour”. The case, in fact, originated in
Scotland. The differences in Scottish law relating to the sale of goods has, however, no
significant impact to the issues addressed in the case which are relevant to our discussion.
41 Ibid, at 485. For additional comments and discussion on the development of Romalpa
clauses, see B Mcguire, “Retention of title in the 1990s: the disowning of Romalpa
continues” (1994) 16 Dublin University Law Journal 40; G McCormack, “ Reservation of
title — past, present and future” [1994] The Conveyancer and Property Lawyer, 129.
42 See P. Latham, “Retention of Title. Recent Developments in Europe”, (1983) Journal of
Business Law 81; cf S Gowan, A Clark and G Golberg, “Will English Romalpa clauses
become registrable securities?” (1993) 54 Cambridge Law Journal 43.
43 See R Bradgate, “Retention of Title in the House of Lords; Unanswered Questions”,
(1991) 54 Modern Law Review, 726.
44 Per Goff LJ in Clough Mill [1985] 1 WLR 111, at 116.
45 See, for example, Part IV Division 8 Singapore Companies Act (cap 50); Part XII UK
Companies Act 1985 and Part 3.5 of the Australian Corporations Law.
46 Ss 131 & 132 Singapore Companies Act (cap 50); ss 395 and 396 UK Companies Act 1985
and s 263 Corporations Law.
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(1997)
The general rule relating to priorities is that while non-registration of a
registrable security interest does not invalidate the security, it will generally
cause the unregistered interest to rank below any bona fide registered
interest regardless of the fact that the registered interest may have been
created later.47 As retention clauses are, because of the effect that sellers
intend them to achieve, never registered, a receiver who manages to show
that such a clause in reality constitutes a charge will be able to cause the
seller’s interests to the assets claimed to rank behind that of his appointer.48
In addition, the unregistered charge will generally be void against the
liquidator and other creditors in the absence of a court order to the
contrary.49 Establishing that a retention of title clause constitutes a charge
will therefore thwart the seller’s claim to the goods, effectively taking away
any security which the seller intended to obtain under the clause.50
When will a retention of title clause not be construed to be a charge?
The effect of a “successfully” drafted retention of title clause is simply to
prevent property from passing to the buyer at the outset. The buyer, not
being the owner of the goods thus cannot be said to have created a charge
over them. In the words of Goff LJ in Clough Mill, “the buyer does not,
by way of security, confer on the seller an interest in property defeasible
upon the payment of the debt so secured.”51 The raison d’etre of the
retention of title clause can be found in section 17 of the Sale of Goods
Act (cap 393) and its equivalents wherever Romalpa clauses are validly
accepted. It incorporates the common law concept of freedom of contract
into transactions involving the sale of goods and provides:
“(1) Where there is a contract for the sale of specific or ascertained
goods52 , the property in them is transferred to the buyer at such
time as the parties to the contract intend it to be transferred.
(2) For the purpose of ascertaining the intention of the parties, regard
shall be had to the terms of the contract, the conduct of the
parties and the circumstances of the case.”
47 There are exceptions to this rule which involve situations where the subsequent registered
interest holder has notice of the unregistered charge. See for example R Mansueto,
“Retention of title claims in the context of voluntary administration” (1996) 14 Company
and Securities Law Journal 36.
48 D.S.K. Ong, “Romalpa Clauses”, (1992) 4 Bond Law Review, 186, 190. See also s 279 to
282 Australian Corporations Law.
49 S 131(1) Companies Act (cap 50).
50 See M N Connock, “Retention of Title: Divining the Principles, Drafting a Clause and
some Practical Issues”, (1994) 22 Australian Business Law Review 37, at 39.
51 [1985] 1 WLR 111, 119.
52 Although the section refers specifically only to specific and ascertained goods, it is generally
accepted that the position as regards unascertained goods is the same except that for
unascertained goods, property can only pass after the goods have been ascertained.
Property in unascertained goods thus cannot pass prior to the goods being ascertained
regardless of the intention of the parties.
9 S.Ac.L.J.
Visiting an Old Friend — The “Romalpa” Clause
259
Determining the intention of parties has been one of the most common yet
difficult tasks faced by courts in cases involving the law of contracts. No
doubt, in contracts of sale, the law requires the court to look not only at
the wording of the contract but also to all the surrounding circumstances
of the case in determining when parties intend property to pass. There is
constant debate as to whether courts should place greater emphasis on
“freedom of contract” and focus more attention on the terms of the
contract53 or to go behind the contractual terms and examine the impact of
the transaction as a whole.54 While the academic dispute is far from being
resolved, limited guidance is provided by the cases as to how the issue
should be approached as a matter of practice.
When the goods have not been mixed with other goods.
Since the reservation of title clause is a contractual device which defers the
passing of property in goods sold until certain conditions (namely payment)
are fulfilled, the primary claim which the unpaid seller would pursue in
situations where the buyer becomes insolvent is for the return of the goods
sold. In some cases, the goods may have been resold either by the buyer
in his ordinary course of business or by a receiver. In such circumstances,
the seller would wish to be entitled to the proceeds of sale of the goods in
question. While a simple clause stating that the property in the goods
would not pass until payment is made may be sufficient for the seller to
reclaim possession of the goods sold, there are several other matters which
he may wish to include in the drafting of the clause to ensure that he will
be entitled to the goods as well as to the proceeds of sale of the said goods.
First, the seller should make it absolutely clear that he is retaining legal
title to the goods and not merely “equitable and beneficial ownership” of
the goods in question.55 Since the creation of a registrable security is
dependent on the chargor having legal ownership to the goods in question,
ensuring that legal title does not pass until the debt is paid is crucial for the
seller.
Secondly, it would assist the seller’s case if he retained some form of
control over the goods in question. One of the factors which the court in
Romalpa relied upon in deciding in favour of the sellers was the fact that
the contract provided that the buyers were to store the goods in a manner
such that they could be identified as still belonging to the sellers.56 Allowing
53 R M Goode, Proprietary Rights and Insolvency in Sales Transactions, (2nd ed 1989), at
101.
54 See Di Everett, “Romalpa Clauses: The Fundamental Flaw”, (1994) 68 Australian Law
Journal 404 and Bradgate, supra, note 43, at 728.
55 Re Bond Worth [1980] Ch 228.
56 Aluminium Industrie Vaasen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676, at 686.
See also Re Bond Worth Ltd [1980] Ch 228, at 263; Re Andrabell Ltd [1984] 3 All ER
407, at 415; Re Peachdart Ltd [1984] Ch 131, at 142.
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(1997)
the buyer to deal freely in the goods on the other hand may result in the
court finding such an arrangement incompatible with the seller’s ownership
of the goods.57
Thirdly, if it is intended for the goods in question to be resold, the seller
should provide expressly for a power of sale and for the proceeds of such
sale to be kept in a separate account and recorded separately from the
buyer’s regular business activities.58 It has been suggested that to give full
effect to such an arrangement would be “somewhat unsatisfactory” as it
would mean that all the money received from the resale of the goods
would have to be held on trust for the sellers and that this would interfere
with the daily business activities of the buyer.59 Having regard to the
competitive markets that goods suppliers are forced to deal in nowadays
it would be an uphill task to persuade buyers to bear the additional
administrative burden and costs associated with the arrangement. The
alternative would be to provide, as was done in Romalpa, that the seller
may require the buyer to keep the proceeds and accounts separate.
Considering the limitations placed on Romalpa by some later cases, it is
uncertain whether such a provision would have the same effect as it did in
that case if the issue were placed before the courts today.
The objective of the drafting exercise is to indicate that the seller retains
some form of dominion over the goods and proceeds such that the courts
may be able to find that a fiduciary relationship is established between the
parties. No single factor will be sufficient to establish this conclusively. The
challenge faced by sellers is to build in enough safeguards in the contract
to indicate that they wish to retain title over the goods sold without
overstepping the line and obtaining an interest in what is rightly the buyer’s
property.60
Goods which have been mixed in a manufacturing process or incorporated
into another product.
Reservation of title clauses frequently contain a provision whereby
ownership of products manufactured with the goods sold is to vest in the
seller or a provision where the seller is to acquire ownership of any articles
in which such goods are incorporated.61 It was suggested in Borden that if
it is to be held that a seller had an interest in a product which had
incorporated goods sold by him or in proceeds of any such product, the
57 Re Bond Worth [1980] Ch 228, at 256–261.
58 Aluminium Industrie Vaasen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676, at 687,
691–693.
59 Atiyah, supra, note 3, at 458–459.
60 For examples showing the difficulty in drafting an acceptable clause, see Compaq
Computer v Abercorn Group, [1993] BCLC 602, at 612; Peerless Carpets Ltd v Moorhouse
Carpet Market Ltd (1992) 4 NZBLC 99–266.
61 Benjamin, supra note 34, at paragraph 5–122.
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Visiting an Old Friend — The “Romalpa” Clause
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necessary inference is that the interest must have been created as a security
for the payment of the debts of the buyer in respect of the goods supplied
and would in effect be a registrable charge.62 As mentioned earlier, the
judgements of the subsequent cases of Bond Worth63 and Peachdart64 gave
much support to this assertion. The courts have therefore been reluctant
to imply a term that the seller is entitled to trace the goods sold into
manufactured articles.65 The more recent case of Clough Mill,66 however,
indicates that while the above proposition reflects the general nature of
things, it is possible for parties to contemplate for property in manufactured
goods to vest in the seller of products which have been used to manufacture
those goods without such an agreement constituting a charge over the
manufacturer/buyer’s property. The circumstances which would result in
such a situation, however, were not clearly spelt out by the judges.
What in effect a court would be doing in recognising the effectiveness of
such a clause is to acknowledge some kind of agency or bailor/bailee
relationship between the parties vis-à-vis the manufacture of the completed
product. To hold that the arrangement does not create a charge over the
buyer’s property would necessitate a finding that the property in the newly
completed product vests in the seller upon its coming into existence.67 This
in turn would imply that the buyer undertook the manufacturing process
for and on behalf of the seller whether as their agent or as an independent
contractor. Any sale of the completed products prior to payment of the
original goods, at which point the property in the completed goods would
pass to the buyer, would also be for the seller’s benefit. There are, however,
several issues which need to be addressed prior to parties agreeing to enter
into such an arrangement.
Administrative costs
First and foremost would be the issue of the additional administrative costs
of such an arrangement. The buyers would have to keep records of which
goods were used for each of their manufactured products and clearly arrange
for the goods to be separately stored and accounted for so as to prevent
accidental “conversion” of what is legally recognised as the seller’s property.
Buyers would wish to be compensated for these added costs as not only
would the arrangements not benefit them, it may also provide them with
additional difficulties in inventory management. Determining the costs of
these administrative arrangements would also be difficult.
[1981] Ch 25. Per Templeman LJ at 44, 45 and Buckley LJ at 46, 47.
[1980] Ch 228.
[1984] Ch 131.
See Borden v Scottish Timber Products Ltd [1981] Ch 25, at 46; Hendy Lennox Ltd v
Grahame Puttick Ltd [1984] 1 WLR 485, at 499.
66 [1985] 1 WLR 111.
67 Ibid, at 119 and 124. Cf views expressed by Ong, supra, note 48, at 188.
62
63
64
65
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Identification of goods
Secondly, there is the practical difficulty of identifying the goods once they
have been mixed in the manufacturing process. It is easy to identify goods
which have not been mixed with other goods. Even contracts involving
small items in numerous quantities would also not pose too much of a
difficulty in present times. With modern techniques of inventory
management and the use of computer technology and bar-coding devices,
marking and keeping track of the goods would prove to be relatively simple
once the appropriate machinery is in place. The situation is very different
where raw materials have been used for manufacturing. This is especially
so where there are other parties supplying similar products to the buyer.
This was the dilemma faced by the sellers in Re Peachdart Ltd.68 They were
unable to persuade the court that leather used for the manufacture of
handbags was identifiable as being theirs. Again, it is possible to arrange
for the raw materials from different sellers to be treated separately and to
maintain records tracing each consignment to its finished product. It is,
however doubtful if any buyer would be willing to accept the administrative
cost and inconvenience associated with any such arrangement.
Overlapping Romalpa clauses
Thirdly, there is the legal quandary posed in a situation where the final
product consists of different goods all of which are subject to “Romalpa”
clauses which vest property in the manufactured goods in different sellers.
So far, such a scenario has yet to be presented for judicial consideration.
It is not difficult, however, to envisage such a situation arising having
regard to the presently widespread use of “Romalpa” clauses in supply
contracts. The logical solution would be to recognise the respective sellers
as co-owners of the manufactured articles in such a situation. Matters may
be further complicated where parties have knowledge of the existence of
another’s “Romalpa” clause but, in total disregard, seize and sell the
manufactured goods in satisfaction of their own debt. Issues of whether
one seller can be made to account to another will then arise. It has been
suggested that a possible solution to address this problem is to apply the
common law doctrine of “confusion” to the situation.69 The doctrine relates
to situations where there has been an intermixture of goods owned by
different persons such that property in each can no longer be distinguished.
Under the doctrine, parties whose goods have been mixed are recognised
as co-owners of the mixed mass generally as tenants in common where the
quantities and values of the goods are unascertainable and as owners of
68 [1984] 1 Ch 131.
69 See P Rozenberg, “Retention of Title Clause and Mixed Chattels” (1990) 18 Australian
Business Law Review 79; John de Lacy, “Romalpa theory and practice under retention
of title in sale of goods” (1995) 24 Anglo American Law Review 327.
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proportionate shares where it is possible to ascertain the value of the
goods mixed. The doctrine was adopted by the common law from the
Roman codes in the 1800s.70 Although most of the cases involving the
doctrine are relatively old, the doctrine has been applied as recently as
1989.71 The combination of the doctrine with reservation of title clauses
has yet to be subjected to the scrutiny of the courts.
“CURRENT” DEVELOPMENTS
The other significant development by the Armour case lies in their
Lordship’s remarks with regards to what is commonly referred to now as
“current account” clauses or “all sums” or “all moneys” retention clauses.72
The clause in that case provided that “all goods delivered by (the sellers)
remain (their) property...until all debts owed to (them) including balances
existing at relevant times...are settled”. The clause in Romalpa and
subsequent cases such as Borden and Peachdart contained similar provisions
but the issue as to the validity of the “current account” nature of the
clauses was not discussed. Although it has been said that the courts have
“generally been kind”73 to such clauses, no comment was made on the
matter until the case of John Snow and Co Ltd v D.B.G. Woodcraft and
Co. Ltd.74 The main issue in that case was whether or not a reservation of
title clause was incorporated into the contract. Boreham J, however, without
discussing the matter in any detail, averred to the fact that the clause in
issue was an “all-liabilities” clause and upheld it in favour of the seller.75
Although the facts of the Armour case involved a complete non-payment
of the purchase price of the goods and not one where the debt had been
partially paid, the validity of the all-debt clause was specifically dealt with
by the judges in the case. This was presumably because the all-debt effect
of the clause could not be severed from the reservation of title clause and
it was sought for the whole clause to be struck down because of its all-debt
nature. It was held, however, that such a clause was valid and did not
create a security interest in favour of the seller which could form the
subject matter of a charge. Lord Keith in delivering the judgement of the
House of Lords stated that the court was “unable to regard a provision
reserving title to the seller until payment of all debts due to him by the
buyer as amounting to the creation by the seller of a right of security in
70 Ibid, at 80. In the UK, the Sale of Goods Amendment Act 1995 has given legislative
recognition of this concept of common ownership of goods forming part of an identified
bulk. For a further discussion of this issue, see Tom Burns, “Better late than never: The
reform of the law on the sale of goods forming part of a bulk” (1996) 59 Modern Law
Review 260.
71 See the New Zealand case of Coleman v Harvey [1989] 1 NZLR 723.
72 See B Avery, “Retention of Title Revisited”, (1991) 141 New Law Journal, 537.
73 Connock, supra, note 50, at 43.
74 [1985] B.C.L.C. 54, hereafter referred to as “John Snow”.
75 Ibid, at 62.
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favour of the seller. Such a provision does in a sense give the seller security
for the unpaid debts of the buyer, but it does so by way of a legitimate
retention of title, not by virtue of any right over his own property conferred
by the buyer.”76 The all sums retention clause (or “current account” clause)
has now thus been endorsed by the courts as a legitimate means of
protection for vendors under a commercial contract of sale.
The current account clause takes several forms in present day usage. Its
purpose is to retain title to goods sold until, not only after the price of the
goods supplied have been paid, but also after other sums owed by the
buyer to the seller have been satisfied. The other sums may be moneys
owing at the time of the contract, at the time of payment or sums owed on
any account at any time.77 The clause in the Armour case itself was very
broad and provided that “all goods delivered by us remain our
property...until all debts owed to us including any balances existing at
relevant times — due to us on any legal ground — are settled.” The clause
even went so far as to include debts owed to companies related to the
sellers. The impact of holding that such clauses are valid is far-reaching
and poses several interesting practical and legal quandaries.
Impact of “all-moneys” clauses and problems associated with them.
Re-possession of goods which have already been paid for by the buyer
One of the results of upholding the validity of an all-moneys clause is to
allow a seller of goods to retain title to goods which have already been
paid for by the buyer due to there being an outstanding debt owed in
respect of another transaction. An obvious example would be that of a
seller supplying more than one shipment of goods, each of which is to be
paid for separately, but all of which are governed by a general supply
contract containing the clause. Shipments A and B may have arrived but
only A has been paid for. Shipment B on the other hand, has been disposed
of by the buyer. Under an all-moneys clause, the seller would be entitled
to re-possess goods under shipment A because he still retains title in goods
under that shipment, the buyer having yet to pay for shipment B. The end
result would be that the seller has possession of goods for which he has
been paid.
The problem with reaching such a conclusion was first highlighted by
Goodhart and Jones78. The argument is that since the seller is re-possessing
76 [1990] 3 All ER 481, at 485. The case has been followed by the Supreme Court of New
South Wales in Chattis Nominees Pty Ltd v Norman Ross Homework Pty Ltd, (1992) 28
NSWLR 338 and in New Zealand in Geal Investments Limited v Ivil Hotels Limited
(1992) 4 NZBLC 99–280.
77 Bradgate, supra, note 43, at 726.
78 Goodhart and Jones “The Infiltration of Equitable Doctrine into English Common Law”
(1980) 43 Modem Law Review 489.
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Visiting an Old Friend — The “Romalpa” Clause
265
goods which have already been paid for, he is obliged to return the buyer
the price of the goods as there has been a total failure of consideration. If
the seller is not bound to return the said price (as is the case), the necessary
inference is that the all-moneys clause must be a charge over the buyer’s
property.79 Those in support of this view rely on the line of authority
beginning with Rowland v Divall 8 0 which, they contend is authority for the
proposition that the consideration for which the price is paid under a sale
of goods contract is the transfer of property. This argument is founded on
the assumption that there is a total failure of consideration where a seller
recovers property in the situation described above. It has been suggested
that this may not necessarily be so because the buyer has had the use of
the goods for a period of time81 . It is submitted that this is the better view.
Whether or not there has been a total failure of consideration in any
contract depends on the parties performing “the actual thing promised as
determined by the contract.”82 In Rowland v Divall, it was contemplated
for the goods purchased to be resold. In order for an effective passing of
property to take place on the re-sale, the nemo dat rule necessitated property
to have passed to the original buyer under the original contract. The
consideration in such a case would clearly be title in the goods sold. The
situation is somewhat different in a case where goods are bought for
consumption or use in a manufacturing process.83 Clearly, in a case like
Hendy Lennox, where engines are supplied as an integral part of the buyer’s
generator manufacturing process, that part of the consideration is the use
of the engines, or the availability of the engines for use.84 Thus, it is possible
for a situation to arise where the re-possession of goods by the seller does
not constitute a total failure of consideration and does not require him to
refund the price to the buyer. Consequently, it may be possible to argue
that in such situations, the all moneys clause does not create a charge over
the property in question. How the matter will be analysed by the courts,
however, is shrouded with uncertainty.
Problems of determining the value of goods which the seller would be
entitled to repossess under a “current account clause”.
In the example used above, there would not be much objection if the value
of shipment A is less than that of shipment B. One is unlikely to question
the fairness of permitting the seller to re-possess the whole of shipment
79 Ibid, at 510.
80 [1923] 2 KB 500.
81 G McCormack, “All liabilities retention of title clause and company charges” [1989] The
Conveyancer and Property Lawyer, 92.
82 J Chitty, Chitty on Contracts, Vol 1 General Principles (27th ed, 1994), at paragraph 1964.
See also comments on the matter in J Mance, “The operation of an “all-debts” reservation
of title clause” [1992] Lloyds Maritime and Commercial Law Quarterly 35.
83 See for example Yoeman Credit Ltd v Apps [1962] 2 QB 508.
84 See criticisms of Rowland v Divall in G H Treital, Treital Law of Contract, (9th ed, 1995),
at 947.
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A to compensate him for the failure by the buyer to pay him for shipment
B. The question of fairness arises where the value of the goods left in the
buyer’s possession exceeds the balance owed by him to the seller. A currentaccount clause, if valid, would entitle the seller to re-possess all the goods
and to obtain a windfall. Such a situation was in fact contemplated in
Clough Mill in relation to a simple Romalpa clause with reference to a
situation where the buyer may have made part payment in respect of the
goods supplied.85
Goff LJ resolved the issue by distinguishing a contract which was still
subsisting from one which had been terminated. He suggested that in the
case of the former, a term had to be necessarily implied in the contract that
the seller was entitled to re-possess and resell only so much of the goods
as would compensate him for the unpaid purchase price. Any excess
proceeds of sale would be held for and on behalf of the buyer.86 Should the
contract have been terminated, the seller had an unfettered right to repossess
all goods still in the buyer’s possession and deal with them in whatever way
he wished. He had, however, an obligation to repay the buyer the price of
the goods so repossessed because there had been a total failure of
consideration in regard to those goods. The seller could, however, set off
any sum owed in respect of unpaid goods (shipment B in our example)
against the moneys repayable to the buyer.87
It is submitted that Goff LJ’s analysis will only be appropriate where it can
be argued that the supply of each article can be treated as a divisible
obligation and not viewed as part of an entire obligation to supply an
agreed quantity of goods. It is also subject to the qualification that the
goods sold must be for the purposes of resale rather than to be used in the
manufacture of products as in the latter instance, it is arguable that there
is no total failure of consideration. Unfortunately, this point was not fully
argued before the judges in Clough Mill, which actually involved a case of
goods sold for the buyer’s manufacturing business.
A possible solution is to depart from the traditional rule requiring total
failure of consideration by permitting the buyer to have a purely
restitutionary claim against the seller for the excess proceeds arising from
the resale of the repossessed goods.88 Reliance for this proposition is based
on the Australian High Court decision of David Securities Pty Ltd v
Commonwealth Bank of Australia89 where the judges noted that “in cases
85 [1985] 1 WLR 111, at 119.
86 Ibid, at 120.
87 This analysis by Goff LJ has also been suggested as a solution to the conceptual problem
posed by Goodhart and Jones discussed earlier. See also Bradgate, supra note 43, at 730,
732.
88 See K Walker, “All-moneys retention of title clauses: an update” (1992) 67 Law Institute
Journal 725, at 727.
89 (1992) 109 ALR 57.
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Visiting an Old Friend — The “Romalpa” Clause
267
where consideration can be apportioned or where counter-restitution is
relatively simple, insistence on total failure of consideration can be
misleading or confusing....In circumstances where the parties have impliedly
acknowledged that the consideration can be “broken up” or apportioned...
any rationale for adhering to the traditional rule requiring total failure of
consideration disappears”90 Such an approach was suggested in regard to
the scenario hypothesised in Clough Mill where there has been partial
payment of goods supplied. It is submitted that it is only applicable if the
contract is seen to be an “entire” contract which is only partially fulfilled.
It does not, however, resolve the issue posed by the argument that the
consideration for the price is the use of the goods rather than just title to
the goods as it would be extremely difficult to apportion the consideration
in such a case.
Another alternative was presented by Donaldson MR in Clough Mill. He
suggested that an “all-moneys” clause which reserves property in goods to
the seller until the seller has been paid places not only a temporal limitation
but also a quantitative restriction on the seller’s right to resell the goods.
In his words, “[the sellers] can go on selling the [yarn] hank by hank until
he has been paid in full, but if thereafter, they continue to sell, they are
accountable for having sold goods which on full payment having been
achieved, become the buyer’s goods.”91 Bradgate suggests that the analyses
of the judges would produce identical results save that under the analysis
of Donaldson MR, any profit realised on the resale would belong to the
buyer. This, he argues may not be conceptually correct as “if [the seller’s]
interest is limited to the outstanding part of the contract price, it is difficult
to see how he is in truth the owner of the goods rather than the holder of
a charge.”92 Bradgate’s contention must be correct as the result of a valid
reservation of title clause is to keep the goods concerned as the seller’s
property. The seller should thus be entitled to the full proceeds of any sale
subsequent to re-possessing the goods. In addition, Donaldson MR did not
consider the impact of the contract having been terminated in his analysis.
It is difficult to see how the temporal and quantitative limitation of the
clause can continue to operate where the contract ceases.
There is, however, another possibility which may remove the need to go
into the intricacies of the arguments regarding total failure of consideration
under Goff LJ’s analysis and yet preserve the conceptual integrity of the
reservation of title clause. A fair result may be achieved by implying yet
another term into the contract of sale. Because the intention of the parties
is to give to the seller security for payment of goods sold, a term may be
implied93 in order to give business efficacy to a contract which is subject to
90
91
92
93
Ibid, at 79.
[1985] 1 WLR 111, at 126.
Bradgate, supra note 43, at 731, 732.
See Chitty, supra, note 82, at paragraphs 905–907 on when terms may be implied into
a contract.
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an all-moneys clause that upon termination of the contract, so much of the
property reflecting the value of goods already paid for passes to the buyer.
Thus the seller would only be entitled to repossess goods up to the value
of the unpaid purchase price. To avoid having to depend on the courts’
willingness to imply such a term into the contract should the problem arise,
it would be beneficial for an express term to this effect to be incorporated
as a standard feature of current account clauses.
Identification of goods
Another practical difficulty arising from the use of current account clauses
relates to situations where there is a running account between the seller
and the buyer. This involves long-term contracts where there is a periodic
supply of goods over time together with payments made at intervals.
Connock considered the matter to be straightforward. His view was that
“if the account remains continually in debit [in favour of the seller], then
payment of all debts has never been made and property in any goods
supplied never passes to the buyer. If a nil balance occurs then the account
is ruled off. That is, property passes in all goods paid for at the time the
nil balance is achieved.”94 It is submitted that the practical implications of
such an analysis may pose some difficulties in instances where nil or credit
balances are achieved.
Where the goods supplied have been mixed with earlier shipments, it would
be a difficult task to identify which goods “belong” to the shipments prior
to the nil balance being achieved and which property has passed on to the
buyer. Similarly, the seller would not be able to identify which goods still
belong to him pursuant to the reservation of title clause. An example of
such a scenario came about in the unreported Victorian Supreme Court
case of Ralph McKay Ltd v International harvester (Receivers and Managers
appointed) 95 where parts had been supplied over a period of time, only
some of which had been paid for. The parties in that case, however, came
to an agreement as to which parts had and which had not been paid for.
Again the use of electronic marking devices and the common law doctrine
of confusion discussed earlier would come in useful in resolving these
practical difficulties.
LOOKING AHEAD
The Discomfort with Romalpa Clauses
It is clear from the cases that the primary function of the retention of title
clause is to protect the seller against the insolvency of the buyer. From the
94 Connock, supra, note 50, at 44. This view is also shared by Hicks, “Retention of title —
Latest Developments” [1992] Journal of Business Law 398.
95 As referred to by Rozenberg, supra note 69. See also Collier, supra note 5, preface.
9 S.Ac.L.J.
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269
practical and commercial point of view, such clauses give to the seller a
form of security for the price of the goods sold and appear to be equivalent
to a grant of a mortgage or a charge upon the goods to the seller.96 The
effect of permitting such an arrangement, however, is to give the seller
priority over other creditors of the buyer in the event of the buyer’s
insolvency. This seems to run counter to the policy of not permitting a
particular creditor to gain a preference over another and to the rationale
behind the requirement to register charges under the Companies Act.97
Lord Templeman in Borden stated that to allow claims based on such
clauses would in effect produce “a result which other creditors of the
defendants might justifiably regard as fraudulent preference”98 and objected
to proprietary claims of this nature on the ground that “they derogated
from the principle that the property of a company in liquidation should be
applied in satisfaction of its liabilities pari passu”.99 It erodes one of the
fundamental objectives of insolvency law which is to achieve a pari passu
distribution of the uncharged assets of an insolvent company among
unsecured creditors.100 It has been argued, however, that the pari passu
principle has already been severely affected by the recognition of floating
charges and that there is “no logic in striking down retention clauses but
allowing other forms of security to remain untouched”.101 The Cork
Committee102 in discussing the merits of Romalpa clauses acknowledged
that a blanket avoidance of such clauses will not enhance the position of
unsecured creditors as it would be the floating charge holder who would
ultimately benefit.103
In addition, the courts have rejected the argument that Romalpa clauses
should be treated with caution simply because they permit trade creditors
to circumvent the registration requirements of laws relating to corporations
granting securities over their assets.104 The rationale for the courts so doing
is in part related to the importance placed on the freedom that parties
should have when entering into contracts. The position appears to be that
if parties are able to freely negotiate an agreement, the result of which
legally enables them to avoid having to comply with statutory registration
requirements, then the court should give effect to such an arrangement.10 5
It has been argued, however, that total freedom of contract is inappropriate
where the whole purpose is to affect the rights of third parties who have
96
97
98
99
100
101
102
103
104
105
Atiyah, supra, note 3, at 461.
Ibid, at 462. See also Ong, supra, note 49, at 186.
[1979] 3 WLR 672, at 686.
See Goodhart supra, note 78, at 511.
See the Harmer Report, infra, note 111 , at paragraph 33.
Connock, supra, note 50, at 54.
See The Cork Committee Report , supra, note 8.
Ibid, at paragraph 1634.
See Clough Mill Ltd v Martin [1985] 1 WLR 111, at 121.
See Atiyah, supra, note 3 at 462.
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no say in the contract.106 The rationale behind requiring registration of
charges over corporate assets appears clearly in the judgement of Buckley
J in Re Jackson & Bassford in which he said that “the object of [registration]
legislation is that those who are minded to deal with limited companies
shall be able, by searching a certain register, to find whether the company
has encumbered its property or not.”107 The disclosure of interests in the
property of a company is designed to assist creditors in assessing the risks
involved in granting, continuing to grant or extending the grant of security
or credit to the company.108 In addition, accounting practice, which focuses
on substance rather than form, appears to disregard retention of title clauses
in accounting for inventory. Goods which may be subject to such clauses
are thus treated as being the property of the buyer and are reflected as
such in accounting documents.10 9 Holders of floating charges over a
company’s stock in trade may thus be taking security over nothing as all
the stock may be the property of the company’s goods suppliers. The
problem would be accentuated if the goods are subject to a valid “current
account” reservation of title clause. There is also the problem occasioned
by the factoring of book debts. Fears have been expressed that the claims
of sellers of goods which are subject to a Romalpa clause may prevail over
claims of the factors who have bought the debts arising from the resale of
those goods.110 Such concerns have prompted several common law
jurisdictions to evaluate the impact of Romalpa clauses and to propose
legislative changes in an attempt to deal with these concerns.111
A Registration System?
It appears that much of the debate surrounding the future of reservation
of title clauses revolves around the issue of creating some form of
registration system for such clauses. A possible model to follow is that of
the Ontario Personal Property Act 1967.112 The system essentially requires
the seller to lodge a notice against the name of the buyer company that the
buyer intends to give or has given the seller a security interest in the assets
sold, proceeds from such assets, or goods in which such assets are
incorporated. For the purpose of the system, reservation of title clauses are
106 Lathem, supra note 42, at 81.
107 [1906] 2 Ch 467, at 476.
108 C Williams, “The Companies Act 1989 and retention of title clauses” (1991) 135 The
Solicitors Journal, 156.
109 Ibid. The writer does, however raise the point that this may be a breach of duty to give
a “true and fair view” as required by companies legislation.
110 The Cork Committee Report, supra, note 8, at paragraph 1602.
111 See for example the recommendations of the Crowther Committee on Consumer Credit
(Cmnd 4596, paragraphs 5.7.49–57), (UK); recommendations of the Irish Law Reform
commission Report on Debt Collection: (2) Retention of Title (L.R.C. 28–1989), (Ireland);
recommendations of the General Insolvency Inquiry, Report No. 45 (“the Harmer
Report”), paragraph 755, (Australia); cf recommendations of the Cork Committee Report,
supra, note 8, paragraph 1650;
112 See The Harmer Report, ibid, at paragraphs 752–753.
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Visiting an Old Friend — The “Romalpa” Clause
271
deemed to grant to the seller a security interest. There is also a priority
scheme in respect of competing interests in the property and provision for
equitable regulation of rights in cases where goods of more than one supplier
have been used in the manufacturing process.113 Such a model was in fact
recommended in Australia by the Harmer Committee Report under a
General Insolvency Inquiry, in the UK by the Crowther Committee Report
on Consumer Credit and the Cork Committee Report on Insolvency Law
and Practice and in Ireland by the Irish Law Reform Commission report
on retention of title. These recommendations have all yet to be adopted in
their respective jurisdictions.
The advantages of such a system of registration are obvious. First, the
system would permit persons who are diligent enough to check the register
to obtain notice of the possibility of the supplier’s interest in the goods of
the buyer and allow such persons to obtain details of the interest from the
customer. Secondly, it provides certainty in a situation of the buyer’s
insolvency as to whether any supplier has an interest in the buyer’s property.
Although there appears to be advantages to adopting a registration system
for Romalpa clauses and the system is in use in some jurisdictions, there
are some unresolved issues which have yet to be adequately addressed.
Is it practically feasible?
It was recognised by the Cork Committee114 that one of the difficulties
concerned in requiring registration of Romalpa clauses “flows from the
multitude of transactions involved”. They recognised that it would be a
physical impossibility for a register to be kept recording every sale
transaction in which such clauses are used. Obviously, the use of computer
technology was not contemplated when the above comments were made.
Some countries have already implemented a system where an assortment
of on-line information regarding companies is readily available. With the
appropriate infrastructure in place, one can see that it would not prove too
difficult a task to establish an easily retrievable database containing simple
details of transactions involving Romalpa clauses. The essential information,
according to the Cork Committee would be to show the name of the
supplier imposing reservation of title, a generic description of the goods
being supplied and the maximum amount which can be secured by the
reservation of title.115 Such a system has in fact been adopted in the United
States.116
113
114
115
116
Ibid, at paragraph 753.
See paragraph 1638 of the report.
Ibid.
Article 9 of the Uniform Commercial Code of the United States.
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Impact on holders of floating charges
Recognising reservation of title clauses as a form of security interest would
complicate the already complex law relating to floating charges. In order
for there to be certainty in the fight for priority, the legislators must make
a policy decision as to who should be entitled to the goods in the buyer’s
possession when the buyer becomes insolvent. At first glance, it would
seem that the general “first in time” rule in determining priority for
conflicting interests seems to be most appropriate. Difficulties will, however
arise especially in cases which involve continuous shipments of goods. An
example of one such difficulty deserves highlighting.
Under a registration system, a simple reservation of title clause will
presumably provide for the seller to obtain a security interest in the property
until he has been paid. Third parties examining the register will only know
that goods are being supplied to the buyer under Romalpa clauses. They
will never be certain when goods in the possession of the buyer have
actually been paid for although an examination of the credit terms offered
by the supplier may provide a rough indication. This may not be a
satisfactory position to a creditor who intends to take a floating charge
over the buyer’s assets. Under the “first in time” rule, a creditor who takes
a floating charge after notice of a Romalpa arrangement has been registered
by the seller will have lower priority to unpaid goods in the event of the
buyer’s insolvency. An analysis of the inventory debt management practice
at the time of granting the floating charge does not give a true reflection
of what the percentage of unpaid goods in the buyer’s possession would be
at the time when the buyer becomes insolvent. As the buyer enters into
financial difficulties, the seller may extend credit so much so that at the
end of the day, all the goods left in the buyer’s possession may be unpaid
for. The security of the holder of the floating charge may thus dwindle
without his knowledge. To require the seller or the buyer to give notice to
subsequent chargees every time there is a change in credit terms would be
administratively impractical. Legislators must decide which of these
categories of creditors should be preferred in cases of the buyer’s insolvency
and provisions must be carefully drafted in the registration legislation to
give effect to this.
In addition, flowing from the possibility of the amount of money owed by
the buyer fluctuating is the inability to accurately assess the quantum of
the security interest resulting from registration of Romalpa clauses. This
will have an impact on general credit risk assessment of the buyer.
Subsequent lenders will not be able to accurately assess this risk.
Incompatibility with the concept of negative pledges.
Related to the issue of conflicting interests with floating charge holders is
the problem of whether or not entering into a purchase transaction which
is subject to a reservation clause would be infringing a negative pledge. To
9 S.Ac.L.J.
Visiting an Old Friend — The “Romalpa” Clause
273
protect the holder of a floating charge from being affected by subsequent
security taken over a company’s assets, it is usual for the instrument creating
the charge to stipulate that the company is not allowed to create subsequent
charges. To say that entering into a purchase agreement which contains a
Romalpa clause constitutes a breach of a negative pledge would preclude
a buyer from effectively proceeding with his business having regard to the
widespread use of Romalpa clauses presently. To say that it does not would
be inconsistent with the basis of the registration system which acknowledges
the Romalpa clause as creating a security interest. A possible solution
would be to include in the legislation that the clause is deemed to be a
security interest only for the purpose of the registration legislation and not
otherwise.
Eroding the effect of reservation of title clauses.
A registration system which incorporates a priority scheme would severely
erode the protection sought by suppliers in using reservation of title clauses.
The main purpose why suppliers opt for such clauses is “to avoid the
unfairness which results when they supply goods on credit, a floating charge
crystallises, and a receiver then takes the goods and realises them for the
benefit of the debenture-holder leaving the supplier with nothing.”117
Recognising a Romalpa clause as merely creating a security interest rather
than reserving title to the seller would render the clause to be absolutely
ineffective where there is a prior floating charge over the relevant assets.
The difficulty lies in determining which category of creditors the law should
give more protection to. Connock has suggested that the law in its present
state has “swung too far in favour of the secured creditor”.118 This writer
agrees and takes the view that goods suppliers should be favoured over
those who take charges over the company’s assets. Suppliers are usually
more greatly affected by a company’s liquidation and are less able to absorb
the loss due to the company’s inability to pay for goods supplied. In addition,
other forms of security are more accessible to banks and other financial
institutions (who are the parties most likely to take floating charges) to
protect their interests. Social and political pressures will no doubt have an
important role in deciding the issue one way or another.
CONCLUSION
The judges in Romalpa would never have expected so much discussion and
dispute to arise in the twenty years that followed the case. While subsequent
developments have clarified the law in relation to when such clauses would
be effective, new issues keep arising to complicate matters further. It is
expected that the next wave of judicial comment would focus largely on
117 The Cork Committee Report, supra, note 8, at paragraph 1634.
118 Connock, supra, note 50, at 56.
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current account clauses following the Armour case119 having regard to the
potential problems posed by the recognition of its validity. Discussions for
reform do not appear to be heading in any firm direction due to the
complexity of the issues faced. For the present, it looks as if the Romalpa
clause is here to stay and its future is dependent on both the ingenuity of
commercial draftsmen120 as well as the courts’ interpretation of the substance
of the agreement entered into between the parties.
VICTOR CS YEO*
119 There are already several first instance decisions in Australia which have followed the
case. See supra note 76.
120 Palmer, “Reservations of Title”, (1992) 5 Journal of contract law 175.
*
LLB (Hons)(Sing); LLM (Melb); Advocate and Solicitor; Lecturer, Nanyang Business
School, NTU.