Retention of title is of immense practical importance. If facilitates security for credit granted when goods are sold on credit. Where the goods are sold on credit, and the buyer fails or refuses to pay or becomes insolvent, then the seller cannot reclaim the goods. He has at best a claim for the price, which may be of limited value where the buyer has become insolvent.
The default position is that property or title to the goods passes to the buyer when the contract is made, which may be on or before delivery of possession. This carries the risk that goods are delivered to a buyer who subsequently becomes insolvent. If the buyer becomes insolvent, then the seller will be an unsecured creditor and is unlikely to be paid the full price or possibly anything.
Under the Sale of Goods Act “default rules”, that apply where nothing is agreed to the contrary the ownership of goods may pass to the buyer before they are paid for. It is possible and often desirable to provide in the sale contract that the seller retains title to the goods until he is paid in full The Sale of Goods Act allows this “reservation of title” because the contract may say when ownership passes.
Providing Retention of Title by Contract
The Sale of Goods Act provides that the title (ownership)of goods passes at the time provided for in the contract. A retention of title clause must, therefore, be provided for in the sale contract. If there is a written, signed document, its incorporation should be clear. However, more difficult questions can arise where there is no written agreement. It may be incorporated by a previous course of dealing. There may be general terms and conditions which have been incorporated in the contract
A retention of title clause effectively creates a security interest for the seller. It is not a security in the strict sense, as the goods have not been vested in the buyer in the first place. Therefore, the Bill of Sale Act which makes mortgages of movable properties by individuals onerous and difficult to achieve, do not apply. There is no requirement to register the “security” interest as a bill of sale or in the Companies Registration Office.
Simple Retention of Title Clauses
A simple retention of title clause provides that the title to specific goods is retained until payment of the price. Where there is a simple retention of title clause with reference to particular goods and their price, the seller must be in a position to prove that the particular goods relate to the particular unpaid contract price. This may be unclear, where there is a running account. There should be some means of identifying the goods by reference to the batches, labels, numbering or markings.
A well-drafted retention of title clause can be critical in protecting the seller’s interests. The clause should specifically say that title (ownership) does not pass until the purchase money is paid in full.
Where the contract for sale still exists, it is likely to be implied that the seller’s right of resale relates only to the outstanding balance of the purchase price. If, however, the contract is terminated by repudiation, then the seller would retain full ownership of the goods and would appear to be entitled to the full price. Where the contract is rescinded, and the goods are resold, the seller may be held to have abandoned his claim for the price.
He may have to repay the excess price received, subject to a counterclaim for compensation. However, he is not obliged to account for the resale value. It may be provided that the buyer resells the goods as agent for the seller and holds it on trust.
Sales to Third Parties in Good Faith
It is possible that an innocent third party may obtain title to the goods if they are sold on by the buyer when he is in possession of the goods with the original seller’s consent. In this case, the original buyer would have committed a civil wrong and would be in breach of contract. However, a sub-buyer from the buyer will generally obtain good title under the Factors’ Act and the Sale of Goods Act.
This is in accordance with the general principle that where goods are in possession of the buyer with the seller’s consent, the buyer may sell in the course of business to persons acting in good faith with no knowledge of restrictions.
Retention until Payment of all Accounts
The seller may wish to retain the title as security, not only for the price of the goods concerned but also the price of other goods purchased. There may be a continuous trading account between buyer and seller. The seller may seek to retain title until payment on a number of or on all accounts is made. A clause that retains title pending payment of all accounts is likely to be valid.
The Sale of Goods Act allows parties to specify the point at which title passes and the conditions on which it does so. It is possible to provide that no title to any goods passes until the price for all goods have been paid. Once the accounts are cleared the title passes under such a clause.
Difficult questions may arise in relation to the operation of such “all sums due” clauses. There is no direct link between the price paid for particular goods or the retention of their title. The buyer or the seller may seek to reclaim goods for which payment has already been made. The courts appear to take the view that the seller may not obtain a windfall and may only resell such goods as are necessary to discharge the debt due.
Complex Retention of Title /Substituted Goods and Proceeds
Because of the risk that goods lose their identity and cease to exist, more complex retention of title clauses seek to attach to the resultant goods or the proceeds of their sale. The difficulty is that the courts may interpret such clauses as amounting to a charge, which would be void if not registered.
The only way to retain security over substituted goods is to create an express charge over the new goods. Typically, it would be impractical to register such a charge, particularly in the case of an individual. In the case of a company such charges if not registered within 21 days and cannot be enforced against a liquidator or the creditors in the event of insolvency
A claim to proceeds may be valid against the Official Assignee in bankruptcy or against a liquidator. It must be possible to assert the right to trace the goods in equity. There are limits of this right. For example, where the proceeds are paid into an overdrawn bank account, the right is usually lost.
In order to trace the goods, there must be a fiduciary relationship. Attempts have been made to constitute this position, by deeming the buyer agent of the seller. Attempts may be made to treat the buyer as having a trustee status by identifying them separately and creating duties to account for them. However, the courts have been reluctant to recognise artificial attempts to create fiduciary and trust relationships, where this does not reflect the reality of the underlying relationship.
Issues When Goods Incorporated
The position becomes more complicated where the seller wishes to retain title to the goods, notwithstanding that they have been changed in form or incorporated into new goods. Many difficult issues may arise in relation to retention of title clauses. Careful drafting is desirable for more complex clauses.
It is difficult to retain title when goods are incorporated into other goods, they become mixed or are manufactured. Many attempts to retain title in this situation fail because the courts hold that the identity of the original goods is destroyed.
Where goods are incorporated into something else such as in a manufacturing process, they may change form so that they be cannot be identified as the goods supplied. If the goods can be identified after the process, a simple clause may be sufficient to retain title to them. When the goods are transformed into other goods entirely, the previous goods cease to exist, and the ownership of the resultant goods is likely to vest in the buyer.
Where the goods become part of the land, they become a fixture and belong to the owner of the land. Fixtures belong to the owner of the land by operation of law. There is a category of tenant’s fixtures where there is a right to detach. If the retention of title apples to such goods, they may be detached and the seller may reassert his ownership once more on detachment.
Charges over Substitute Goods
The position becomes more complicated when the clause seeks to provide for the proceeds of the sale of manufactured goods. These involve both the buyer’s efforts and labour and perhaps, a third party’s goods. In this case, the arrangement creates a charge, so that it must be registered. In an insolvency, the buyer may have failed to maintain the goods proceeds in a separate account and difficulties may be found in tracing money into mixed funds.
Where goods lose their identity and are incorporated in other goods, a purported retention of title to substituted goods may be held to be an equitable charge with respect to the substitute goods. This being so, it would require registration in the Companies Registration Office or as a bill of sale.
Charge over Proceeds
The reservation of title clause by itself, will not, by itself create an entitlement to the proceeds of an onward sale. A specific clause is needed to charge the proceeds. If the buyer is allowed to mix the proceeds with his own monies, then he is no longer a trustee but a debtor. It is necessary that the goods are designated and that the monies are kept in a separate account.
Charges over the proceeds of sale may constitute a charge on book debts and thereby be registerable. These clauses are more difficult to uphold. The buyer should be obliged to pay sale proceeds into a separate account and to keep them on trust. Complications arise if the proceeds are mixed up
References and Sources
Brian Doolan, A Casebook on Irish Business Law (1989)
Henry Ellis, Modern Irish Commercial and Consumer Law (2004)
Michael Forde, Commercial Law, 3rd Edition (2005)
Linehan, Irish Business and Commercial Law (1995)
McCormack, Reservation of Title 1990 (1994)
Patrick O’Reilly (ed.), Commercial and Consumer Law (Statutes) (2000)
Sean Quinn (ed.), Statutes Revised on Commercial Law, 1695-1913 (1994)
Fidelma White, Commercial Law (2003) (2nd Ed 2012)
Fidelma White, Commercial and Economic Law In Ireland (2011)
Vincent Grogan, Thelma King and Edward J. Donelan, Sale of Goods and Supply of Services: A Guide to the Legislation (Law Society of Ireland, 1983)
Paul Anthony McDermott, Contract Law (Butterworths, Dublin, 2001)
2011 Report of the Sales Law Review Group,
Atiyah and Adam’s Sale of Goods 13th Ed (2016)
Bridge, Benjamin’s Sale of Goods 9th Ed (2015);
Bridge, The Sale of Goods 3rd Ed (2014)
Blackstones’ Statutes Commercial and Consumer Law 2017
Goode on Commercial Law 5th Ed 2017
Sale of Goods Act 1893
Sale of Goods and Supply of Services Act 1980
Electronic Commerce Act 2000
Criminal Justice (Theft and Fraud Offences) Act 2001 (50/2001)
International Carriage of Goods by Road Act 1990 (13/1990)
European Union (Consumer Information, Cancellation and Other Rights) Regulations 2013 (S.I. No. 484 of 2013)
European Communities (Certain Aspects of the Sale of Consumer Goods and Associated Guarantees) Regulations 2003 (S.I. No. 11 of 2003)