Case law: businesses relying on retention of title clauses may face unintended consequences
Businesses operating on a model under which their contracts state they retain ownership of goods sold until they have received payment are advised to understand the impact of such clauses should problems arise.
This update was published in Legal Alert - December 2013
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Two recent decisions highlight the potential consequences if a customer sells the goods to an innocent third party before the customer itself has paid for them. Clauses in a contract stating that the seller remains the owner of goods he has sold until it is paid for them are known as 'retention of title' or Romalpa clauses by lawyers.
The facts of the two recent cases are complicated but they involved purported sales of goods to a third party by a buyer in circumstances where:
- the buyer had bought the goods from its supplier on credit;
- according to the agreement between the buyer and the supplier, the buyer did not own the goods until the supplier had been paid;
- the buyer had not paid the supplier for those goods when it sold them to the third party.
The supplier argued that the buyer had sold goods to the third party when it did not own them. In each case the Court decided the retention of title clause was valid, and title to the goods had not passed to the customer.
In such cases, title potentially passes to the innocent third party on the sale of goods by a 'non-owner' - with further legal implications. A supplier must therefore make sure it understands the different potential outcomes that can arise from its customers' activities under retention of title clauses. Specialist legal advice on retention of title clauses is highly recommended.
Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.
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