The Perfect Antidote

Kelly Chung examines the groundbreaking retention of title case.
In the course of trade and commerce through the centuries, there have been many a time when an unpaid seller of goods is left to bear the loss that arises from the insolvency of the buyer. Then, some 40 years ago, along came the case of Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676 (“Romalpa Case”) which afforded some relief to an unpaid seller’s plight.
The Romalpa Case involved the sale of aluminium foil by a Dutch company (“Plaintiff”) to an English company (“Defendant”). A receiver was appointed over the assets of the Defendant, leaving a sum of £122,239.74 owing by the Defendant to the Plaintiff as unpaid purchase price for aluminium foil supplied.
The Plaintiff sought to recover £50,235.00 worth of aluminium foil supplied by the Plaintiff which remained in the Defendant’s possession as well as the proceeds from the sub-sales of the foil supplied by the Plaintiff amounting to £35,152.66 which had been kept by the receiver in a separate account.
The Plaintiff relied on clause 13 of their standard terms of sale (“Clause 13”) which provided, inter alia, that “the ownership of the material to be delivered by (the Plaintiff) will only be transferred to the (the Defendant) when he has met all that is owing to (the Plaintiff)” (“First Part”).
The latter part of Clause 13 (“Second Part”) also provided, inter alia, that:
(1)     if the Defendant made a new object with the foil, or mixed the material with other objects, or if the material became a constituent of another product, the ownership of the objects which contained the aluminium supplied by the Plaintiff would be the property of the Plaintiff as surety until full payment was received;
(2)     the Defendant was to keep the objects for the Plaintiff as fiduciary owner, and if required, store the objects in such a way as they would be recognised as such; and
(3)     the Defendant was entitled to sell these objects in the normal course of business provided that it shall, if required by the Plaintiff, hand over its claims against the buyer of the objects to the Plaintiff so long as the Defendant had not fully discharged its debt to the Plaintiff.
As sections 17(1) and 17(2) of the English Sale of Goods Acts 1893 and 1979 (which are identical to sections 19(1) and 19(2) of the Malaysian Sale of Goods Act 1957) allow the parties to determine the time at which the property in ascertained goods is to be transferred to the buyer, the retention of ownership of the aluminium foil by the Plaintiff under the First Part does not run afoul of the aforementioned legislation. 
The Defendant admitted that the unsold stock of aluminium foil belonged to the Plaintiff and that the Plaintiff was entitled to recover possession of the same. However, it challenged the Plaintiff’s claim to the proceeds of sub-sales of the aluminium foil amounting to £35,152.66.
It was common ground between the parties that:
(1)     the effect of Clause 13 was that so long as the Defendant was indebted to the Plaintiff, any aluminium foil delivered by the Plaintiff which remained in the possession of the Defendant was held by the Defendant as bailee for the Plaintiff; and
(2)     it was implied in Clause 13 that the Defendant was entitled to sell the aluminium foil to sub-purchasers (notwithstanding that the power of sale was absent from the First Part and that the Second Part only permitted the sale of objects manufactured using the foil supplied by the Plaintiff).
The trial judge, Mocatta J, agreed with the Plaintiff’s contention that the bailor-bailee relationship created by Clause 13 showed that the parties had intended to create a fiduciary relationship. Accordingly, the equitable principles on tracing established in In re: Hallet’s Estate (1880) 13 Ch. D 696 applied, namely that:
(1)     where a fiduciary disposes of property, the beneficiary can take the proceeds if they can be identified; and
(2)     if the bailee sells the goods bailed, the bailor can in equity follow the proceeds wherever they can be distinguished.   
The judge held that the Plaintiff was entitled to the proceeds of the sub-sales of the aluminium foil amounting to £35,152.66 which had been kept by the receiver in a separate account.
The judge rejected the Defendant’s contention that the Relevant Clause gave rise to a charge which is registrable under section 95(2)(e) of the English Companies Act 1948 (which is identical to section of 108(3)(f) of our Companies Act 1965). His Lordship held that there was no requirement for a charge to be registered as the property in the foil never passed to the Defendant. Accordingly, the proceeds of the sub-sales belonged in equity to the Plaintiff.
The decision of Mocatta J was upheld by the Court of Appeal. Roskill LJ was of the view that Clause 13 was designed to protect the Plaintiff in the event of the Defendant’s insolvency after the Plaintiff had parted with possession, but not legal title, to the goods.
In considering whether any additional implication arose from the undoubted implied power of sale in the First Part, Roskill LJ said that one was entitled to look at the Second Part as it would be strange if the First Part did not afford any relevant security to the Plaintiff when the Second Part gave security over manufactured or mixed goods. 
According to Roskill LJ, to give effect to the purpose of Clause 13, one must imply into the First Part not only a power to sell but also the obligation to account in accordance with the normal fiduciary relationship of principal and agent, and bailor and bailee. By this reasoning, the Court of Appeal agreed with the High Court that the principles in Re Hallett’s Estate applied and the Plaintiff was entitled to trace and recover the proceeds of the sub-sales of the aluminium foil.
Subsequent to the Romalpa Case, the English Courts had various opportunities to reconsider the efficacy of a retention of title clause (“RT Clause”).
In Re Bond Worth [1980] Ch 228, an attempt by the supplier of synthetic fibre to trace the proceeds of sale of carpets manufactured with the fibre supplied by the supplier through a purported RT Clause was rejected by the High Court. The RT Clause in this case failed as the supplier only retained the “equitable and beneficial” but not legal ownership of the goods which had passed to the buyer. The Court also held that the RT Clause created a charge over the buyer’s assets and required registration under the English Companies Act.
In the following year, the Court of Appeal in Borden (UK) Ltd v Scottish Timber Products Ltd and Another [1981] Ch. 25 rejected a seller’s attempt to trace the resin supplied by it into the chipboard manufactured by the buyer and thereafter to the proceeds from the sale of the chipboard. The Court held that the seller’s ownership of the goods came to an end once those goods which were the subject of an RT Clause became inextricably mixed with other materials such that they could no longer be said to exist in their original form.
An attempt by a supplier to trace the leather supplied by them which had been used in the manufacture of handbags to the proceeds of sale of the handbags under an RT Clause failed in Re Peachdart Ltd [1984] Ch 131. Notwithstanding the RT Clause, the Judge held that where raw material was sold to a manufacturing company, the parties must have intended that the seller should lose its ownership of every piece of leather as soon as the buyer commenced work on it. Accordingly, the seller’s right to the sale proceeds was in the nature of an unregistered charge and was void for want of registration.
However, an RT Clause was held to be effective when the goods sold retained their identity even after being processed into a finished product. In Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd [1984] 1 WLR 485, property in a diesel engine was held not to have been transferred to the buyer by virtue of its being incorporated into a generator which was not ready for delivery to the sub-buyer.
In Armour v Thyssen Edelstahlwerke AG [1991] AC 339, which involved the supply of steel strip, the House of Lords upheld the validity of an RT Clause and observed that a provision reserving title to the seller until payment of all debts due to him were paid did not amount to the creation of a security interest in favour of the seller.
The observation by the Law Lords in Armour accords with the earlier decision of the Court of Appeal in Clough Mill v Martin [1985] 1 WLR 111. However, Goff, LJ in Clough Mill agreed per obiter with the decision in Re Peachdart which held that an RT Clause would give rise to a charge insofar as it purports to retain title over objects which are manufactured using the seller’s goods even if such an interpretation did “violence” to the language of the RT Clause.
The above cases suggest that the English Courts have been reluctant to uphold the efficacy of an RT Clause to manufactured goods where the original goods have lost their identity. It should also be noted that the RT Clauses considered in these cases may not be identical and the decision of the court in each case turned on the construction to be given to the relevant clause.
Gebrueder Buehler AG v Peter Chi Man Kwong & Ors [1987] 1 MLJ 356 is a noteworthy case from Singapore. In this case, the High Court held that the plaintiffs had lost their title to certain equipment which were subject to an RT Clause when the equipment were annexed to land to such a degree that they became fixtures and formed part of the land to which they were affixed.
The efficacy of an RT Clause appears to be recognised by the Malaysian Courts. In Emer Sdn Bhd (under Receivership) v Aidigi Sdn Bhd and Another Appeal [1992] 2 MLJ 734, the Supreme Court referred to the Romalpa Case and acknowledged that an RT Clause is a means by which an unpaid seller can prevent the passing of ownership in property. However, the apex court in this case held that the preamble to an agreement relied upon by a party did not amount to an RT Clause.
In Au Yong Kun Min v Tractors Malaysia Bhd [1997] 5 MLJ 168, Augustine Paul J, referring to the Romalpa Case, commented that the right of a seller to retake possession of goods can be achieved by an RT Clause.
In Interdeals Automation (M) Sdn Bhd v Hong Hong Documents Sdn Bhd (Civil Appeal No. P-02-794-2004), Sri Ram JCA, referring to the Romalpa Case, stated that it is settled law that parties to a contract for the sale of goods may agree that ownership in the goods would only be transferred from the vendor to the buyer when the latter has met all his obligations contained in the contract. The learned judge added that such a term has the effect of making the buyer a trustee or fiduciary of the goods for the seller thereby enabling the latter to trace them into the hands of third parties to whom the buyer may transfer them. The Court of Appeal refused to enforce a purported RT Clause in this case as it was a stipulation imposed after the contract had been entered into.
While the above-referred cases show that the Malaysian Courts recognise the validity of RT Clauses, the opportunity to consider the limits of such clauses has yet to arise.
As RT Clauses are primarily found in private contracts between a supplier and a buyer of goods, they have a tendency to come to light only upon insolvency of the buyer. For example, the receivers in Lipe Ltd v Leyland DAF & Ors [1993] BCC 385 received about 400 claims arising from RT Clauses when they were appointed as receivers over the assets of Leyland DAF.
To achieve greater transparency for stakeholders concerned, including secured creditors whose security over materials, work in progress and completed goods may be defeated by effective RT Clauses, various jurisdictions have introduced legislation that contain provisions which deem an RT Clause to be a “security interest” in goods and require the same to be registered. Examples of such legislation include the Uniform Commercial Code of the United States of America, the Personal Property Securities Act 2009 of Australia and the Ontario Personal Property Act 1967 of the State of Ontario, Canada.
The Romalpa Case has been described by the eminent jurist, Professor Sir Roy Goode, QC  in Proprietary Rights and Insolvency in Sale Transactions (3rd Edition) as “the most important decision in commercial law in this (i.e. the 20th) century.”  
RT Clauses have undoubtedly assisted unpaid sellers to trace and recover their goods and the proceeds of sale of such goods while those goods remain identifiable. However, the post-Romalpa Case decisions show that the English Courts have been reluctant to enforce RT Clauses in cases where the seller’s goods have been mixed with other material in a manufacturing process and ceased to be identifiable. Hence, while an RT Clause serves an important purpose, it is by no means the perfect antidote which cures all financial ills that beset an unpaid seller when the buyer of goods becomes insolvent.