In order to be valid under Australian law, the items subject of the retention clause must be capable of being identified by the seller. If the seller supplies a standard product, steps must be taken to ensure that that the goods are readily identifiable.
The retention of title clause must adequately identify the goods. The seller should name the goods specifically in the contract of sale and place suitable identification symbols and marks on the goods to indicate that the goods are the property of the seller – Australian Encyclopedia of Forms & Precedents, Retention of Title Clauses.
A retention of title clause can be a very useful tool but the terms and conditions need to be drafted properly to be enforceable.
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If the goods are no longer readily identifiable due to their being used in the manufacture of another good, then a basic retention of title clause will not be sufficient to protect the seller. In such a situation a seller can protect their interest by using a ‘aggregation’ retention of title clause which claims ‘property, or an interest, in any manufactured or processed goods of which the goods supplied by the seller to the buyer have become part during the course of manufacturing or reworking’: Australian Encyclopedia of Forms & Precedents.
There are certain difficulties, however, in aggregation clauses. Courts have sometimes held that such clauses create a ‘charge’ which is only effective against third parties if registered with ASIC. The wording of the clause therefore is extremely important. A simple retention of title clause will not constitute a charge over the buyer’s property and therefore does not require registration: Clough Mill Ltd v Martin [1984] 3 All ER 982. The court will consider the commercial substance and reality of the transaction in determining whether a charge is created: Compaq Computer Ltd v Abercorn Group Ltd [1993] BCLC 602.
Associated Alloys v ACN 001 452 106 Pty Ltd [2000] HCA 25; 202 CLR 588
Facts:
The appellant sold steel to the respondent. Invoices were issued to the respondent with a retention of title clause. The respondent has not paid the appellant the full amount owing under the invoices. The respondent has used the steel to fabricate pressure vessels, heat exchangers and columns (“the steel products”). All but one of these steel products had been shipped to a third party. The remaining steel product was still in the respondent’s possession.
The retention of title clause in question:
“[5] In the event that the buyer uses the goods/product in some manufacturing or construction process of its own or some third party, then the buyer shall hold such part of the proceeds of such manufacturing or construction processes as relates to the goods/product in trust for the seller. Such part shall be deemed to equal in dollar terms the amount owing by the buyer to the seller at the time of the receipt of such proceeds.”
Held:
Loss of ascertainable identity of good(s):
- The HCA unequivocally held that the appellant did not retain any proprietary interest in the steel supplied to the respondent under the invoices because the steel was “no longer capable of being ascertained in the steel products manufactured by the buyer”.
- Therefore the loss of ascertainable identity of the good(s) will be fatal to the effect of the retention clause.
Retention of title clauses generally:
* It appears that a retention clause will only be given effect where:
- “[the clause] is clearly accepted as party of the agreement between the parties; and
- they can be applied to the original goods that were sold where such goods may be readily identified, retrieved intact, reconstituted, separated and returned to the seller; or
- a separate financial account or fund has been established, as proper to a fiduciary relationship between the parties, in order to receive the proceeds of the sale of the goods possessed by one but still purportedly owned by another.”
* Judges are reluctant to give effect to the retention clause where:
- There is doubt that the clause ever became part of the agreement between the parties;
- Where the goods bought have been converted by manufacture into some other product so as to lose their original identity;
- Goods have been on-sold to others who have no notice of the clause;
- Where the receipts in payment for the derived goods have been mixed in the financial records of the buyer.
* Where the retention clause creates a charge:
The retention clause in question constituted a charge on book debts which arose from the operation of the contract between the parties.
The HCA confirmed the reasoning of Sheller JA of the Court of Appeal:
“The [retention clause] was designed to protect the seller from the consequences of the buyer’s insolvency by charging part of its book debts. This was achieved by using the device of a trust. The trust embraced part of the proceeds of the manufacturing process when the price to be paid for those derived goods became payable either immediately or in the future and continued until the buyer paid the seller for the goods the seller sold to the buyer and the buyer used in the manufacturing process. It was one trust and involved as an essential feature a charge on the buyer’s book debts.”– Sheller JA quoted at [20].
* In determining whether the retention clause creates a charge, the court will consider the commercial substance of the transaction in preference to its legal form.
* Pursuant to section 263 of the Corporations Act 2001 (Cth), where a charge is created ASIC must be notified within 45 days of its creation. ASIC is then required by s 263(1) to register that charge in the Australian Register of Company Charges.
* The failure to notify ASIC of a charge and therefore the lack of registration of a charge will ordinarily result in the retention clause being invalid and the seller will assume the role of an ordinary unsecured creditor.
BUT: if the charge has arisen as a result of the operation of law rather than from the agreement between the parties, the validity of the retention clause may be preserved despite the lack of registration. The reasoning the court gave for this exception is as follows:
“In such cases the parties may be ignorant of the operation of law upon their transaction. They ought not suffer adverse consequences by reason of their failure to register a charge which they may not have known the law had created or imposed.” – at [97].
* Therefore one has to consider the following:
- Does the retention clause create a charge?
- If yes, does the charge arise by operation of law or by virtue of the parties’ agreement?
If by operation of law – did the parties ignorant of the operation of law upon their transaction?
* If yes – the fact that the charge is not registered will not be fatal to the retention clause
ii. If by virtue of the parties’ agreement – the parties cannot hide behind their ignorance of the law as it was “by the agreement of the parties, and only by that agreement, that [the retention clause] had whatever effect it did. There was not some overarching principle of law of which the parties might be innocently ignorant.”
* Therefore the fact that the charge is not registered will be fatal to the retention clause.
Conclusion and order:
Appeal dismissed with costs
Where the title to the goods has been transferred to the buyer, then the retention clause is likely to be considered merely a charge where the seller has only a right of security.
Where the title to the goods is retained by the seller, then the retention clause is likely to be valid. See the following comments of Steytler J in Radio Frequency Systems Pty Ltd v Guthrie (as liquidator of ULT Ltd (Receiver Appointed) (in liq)) [2001] WASCA 195:
“…a provision which reserves title to goods sold to the seller until payment, not only of their purchase price, but of all debts due to it, does not amount to the creation by the buyer of a right of security in favour of the seller (Armour v Thyssen Edelstahlwerke AG (1991) 2 AC 339)…
…while a provision of this kind does, in a sense, give the seller security for the unpaid debts of the buyer, “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.” [Armour at 353 as per Lord Keith].”
Commentators have expressed the opinion that while there is an argument in the alternative, courts will usually always hold that a ROT clause is ineffective where goods are mixed: Cannock, Matthew N ‘Retention of Title: Divining the Principles, Drafting a Clause and Some Practical Issues’ Australian Business Law Review, Volume 22, Feb 1994, pp 37-57.
It seems that unless there is some definite way of identifying the particular goods which are subject of the ROT, such as a manufacturer’s mark or serial number, then the ROT will be unenforceable against those goods.
Rozenburg has suggested that the common law doctrine of confusion is a suitable solution to the identification issued arising from mixed goods the subject of a ROT: Rozenburg, Pearl ‘The Retention of Title Clause and Mixed Chattels’ Australian Business Law Review, April 1990, 18, 2. However, whilst this argument exists, the courts have not adopted nor considered this approach.
CONCLUSION & SUMMARY:
If the goods in question (ie, goods the subject of a ROT clause) are mixed with other goods and can no longer be identified, the ROT clause will be unenforceable.
If the goods cannot be identified, the ROT will usually act as a charge over the goods. If the ROT constitutes a charge, then that charge must be registered pursuant to ss 263 and 263(1) of the Corporations Act 2001 (Cth).
The effect of non-registration depends on whether the charge arose by virtue of law or the parties’ agreement. The charge, in this context, will almost always arise by virtue of the parties’ agreement and therefore non-registration will result in the ROT clause being unenforceable.
If the charge arose as a result of the parties’ agreement and that charge has not been registered, the seller’s interest will be that of an unsecured creditor.
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