учебный год 2023 / Wires , Retention of Title Clauses in International Trade Law

RETENTION OF TITLE CLAUSES IN INTERNATIONAL TRADE LAW

A Need For Reform

John David H. Wires

August 2009

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Electronic copy available at: http://ssrn.com/abstract=1471990

TABLE OF CONTENTS

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Electronic copy available at: http://ssrn.com/abstract=1471990

INDEX OF ABBREVIATIONS

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Introduction

The Reservation of Title (ROT) or Romalpa clause1 is a commonly used commercial contract term. Reservation of title clauses stipulate that title to goods sold does not pass to a buyer until the price for those goods has been paid in full. The clause contractually alters the general legal presumption that title in goods passes upon delivery. ROT clauses are used in both common law and civil law legal systems around the world, and serve as a means for sellers to obtain security over their goods, having provided them on credit to a buyer.

The security interest produced by an ROT clause is primarily to protect a seller’s interests in the event of a buyer’s insolvency. That is, where a buyer in possession of goods becomes insolvent, under a well drafted ROT clause, a seller can retain those goods as the proper owner. In effect, as the goods are not owned by the buyer they cannot be made subject to insolvency proceedings. From an economic standpoint, ROT clauses have been recognised as an integral part of commercial law because they promote trade even where buyers have no access to upfront capital.

In the current economic crisis, in which access to capital has become a major issue for businesses around the globe, ROT clauses are an effective way for encouraging commercial transactions. As such, the use of ROT clauses will likely become more attractive to both sellers and buyers. Yet, with the advent of globalisation a greater number of commercial transactions are conducted across national borders. In turn, the validity of ROT clauses has become an issue for not just domestic legal systems, but an important consideration for private international law.

Part I of the paper examines how the current international legal framework deals with the use of ROT clauses in international trade. It explores the current problems and risks imposed on sellers when using ROT clauses to sell goods across national borders. In turn, the paper will highlight that the current international legal framework leaves a great deal of uncertainty for companies relying on ROT clauses. This is because the validity of the clause is often left to the buyer’s insolvency courts.

As such, Part II argues that the international legal framework requires significant reforms for dealing with retention of title clauses in order to provide certainty and confidence to enterprises selling goods internationally on credit to their buyers.

1 See Aluminium Industry Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676.

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Part I

The Current International Legal Framework and ROT Clauses

Retention of title clauses have received little attention in the international context. The European Union (EU) is by far the most active in addressing ROTs in the international sale of goods. In the early 1980s the EU considered the fact that ROTs cause problems with regard to cross border insolvency. In particular, sellers were losing title over their goods (despite purporting to retain it) when their goods become subject to a buyer’s insolvency proceedings. There was no harmonised European approach for determining when a ROT clause would be valid and when it would not.

Despite an ambitious agenda in the 1980s to create a uniform cross border directive on the recognition and effects of simple retention of title clauses, the EC, over 20 years later, settled for something much less.2 Today, two EC Treaty Regulations attempt to deal with the problem. First, Article 4 of Directive 2000/35/EC (On Combating Late Payment in Commercial Transactions) provides that:

Member States shall provide in conformity with the applicable national provisions designated by private international law that the seller retains title to goods until they are fully paid for if a retention of title clause has been expressly agreed between the buyer and the seller before the delivery of the goods.

However, as noted by the European Court of Justice in Commission of the European Communities v Italian Republic,3 the regulation merely forces a buyers courts to uphold an ROT clause if their national law would do so in the domestic context. Article 4 of the Directive is intended to promote the equal treatment of foreign trade enterprises and domestic enterprises within domestic courts. It does not ensure a uniform approach to the validity of ROT clauses across EU Member States. Therefore, despite the regulation, sellers must still understand how a buyer’s domestic courts will view the validity of the ROT clause. As Michael Milo notes, ‘[t]his makes the outcome of questions of property law cases in international transactions unclear.’4

Second, the EU regulation on cross border insolvency declares that:

2The Law Reform Commission (Ireland), ‘Report on Debt Collection: Retention of Title, p 15. Available online at <http://www.lawreform.ie/publications/data/volume7/lrc_51.html>.

3Judgment of the Court (Second Chamber) [2006] ECR I-10597.

4Michael Milo, ‘Retention of Title in European Business Transaction’ (2003) 43 Washburn L.J. 121.

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The opening of insolvency proceedings against the purchaser of an asset shall not affect the seller’s rights based on a reservation of title where at the time of the opening of proceedings the asset is situated within the territory of a Member State other than the State of opening of proceedings.5

Yet, once again no requirement is set for a uniform approach to the use of the ROT clause. The insolvency regulation merely suggests that each county’s insolvency courts must recognise an ROT clause where the law governing the contract would allow the seller to retain title over the goods. A seller therefore must still carefully consider whether the buyer’s insolvency courts will uphold its ROT clause.

There are no other conventions, either within the EU, or within the greater international community which govern the passage of title in sales contracts. Even the United Nations Convention on Contracts for the International Sale of Goods 1980 (CISG) remains silent on the passing of title. Article 4 states that the CISG is not concerned with ‘the effect which the contract may have on the property in the goods sold’.6 Likewise, Article 30 notes that the seller obligations is to, ‘transfer the property in the goods, as required by the contract.’

Surprisingly, there is also no mention of retaining title under the UNICITRAL Model Law on Cross-Border Insolvency. As retention of title matters often end up as disputes over the property in goods of an insolvent enterprise, the Model Law is an important place to address the validity of ROT clauses across borders. This was recognised by the EC in their insolvency regulations (above), but failed to make its way into the international community via UNICITRAL’s text.

Lastly, even the ICC’s INCOTERMS do not specify when title in goods is to pass from seller to buyer.7 The INCOTERMS are commonly used trade terms that companies often incorporate into their sales contracts. The INCOTERMS only clarify when risk (i.e. liability for the goods, but not title) passes to a buyer, who pays for delivery and who is to insure the goods while in transit.

5Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings, Art 7.

6Art. 4(b).

7Albert H. Kritzer, ‘Passage of Risk: Comments on Passage of Risk Under National Rules, Under CISG, Under Incoterms’ Pace Law School Institute of International Commercial Law, 1. Available online at <http:// www.cisg.law.pace.edu/cisg/text/passage.html >.

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Nevertheless, even if the ICC trade terms did specify when title was to pass, those terms would still be subject to the applicable law to determine their validity.

What are the Implications of the Current Framework?

Without an international convention governing the passing of title in goods, the issue is solely governed by the contract of sale and the domestic law which govern that contract. As a result, the law governing ROT clauses in international trade is very decentralised. There is no universally accepted method or approach for determining whether a retention of title clause will be recognised as a valid means of security.

This has stark implications for international sellers. The most common problem associated with an ROT clause is that many enterprises use them in standard form contracts without carefully considering their validity outside national borders. That is, the clause might be effective in their own domestic courts, but the real test the clause faces is whether the buyer’s insolvency courts will give full effect to the clause, so as to secure the seller’s purported retention of title. As a result, one of the biggest implications of the current framework is that sellers often unwittingly lose title to their goods upon their buyer’s insolvency.

Furthermore, under the current framework, when international sellers must fear whether their ROT’s are valid or not, it has the effect of either:

1.Demoting the use of ROT’s. As noted, this perpetuates the lack of available credit, or

2.Slowing international trade, because sellers are reluctant to sell on credit to international buyers.

Either way, an analysis of the current framework for dealing with ROT clauses requires a consideration of how various domestic legal systems deal with ROT clauses. This was a point recognised in the leading Australian case of Roder Zeltund Hallenkonstruktionen Gmbh v. Rosedown Park Party Ltd.8 Roder was the first reported Australian decision to address not only the CISG, but also the validity of an ROT clause under the CISG and private international law. Von Doussa J in the Federal Court of Australia (South Australia District) held that the clause’s

8 (1995) 57 Fed. Ct. Rep. (Austl.) 216-240, CLOUT No. 308 (Fed. Ct., S. Austl. District, Adelaide Apr. 28, 1995). Hereinafter Roder.

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construction and meaning were governed by the CISG,9 but the validity of the clause was governed by the applicable national law (in this case either German or Australian law) since the ‘validity and property effects of a sale contract are expressly excluded from the Convention's scope’.10

Noting that both Australian and German law allowed for the ROT to be upheld, the German seller, Roder, was able to exempt his goods from the winding up proceedings in Australia. However, as we will explore, sellers will not be so fortunate under all national legal systems.

The decision in Roder, to look to domestic law for the validity of a retention of title clause, quickly gained academic approval for the approach to be taken under the CISG. For example, Jacob S. Ziegel notes,

Once the seller has performed its obligations under the agreement, I believe the security aspects should be treated as wholly outside CISG and as governed by domestic law under the relevant conflict of laws rules.11

The decision in Roder also appears to be the position many courts around the world take, or will take, when confronted with ROT clauses in international sales contracts.12 One further example is illustrated by the German Appellate Court of Koblenz in a case concerning a motor yacht.13 In that case, the German Court held that in determining the validity of a retention clause, German law applies because the CISG does not govern the passing of ownership in goods.

Therefore, to understand the current law on creating security interests by way of ROTs we must examine the various positions of national courts on the matter. The following section examines the use of ROT clauses in England, Australia, Canada, the United States, Switzerland and France. These legal systems have been selected because they best illustrate the vastly different approaches domestic courts take to enforcing ROT clauses in international trade.

9Von Doussa J citing CISG Arts. 8, 11, 15, 18 and 29.

10Ibid, Art. 4(a)-(b).

11Jacob S. Ziegel, ‘Comment on Roder Zeltund Hallenkonstruktionen GmbH in Review of the Convention on Contracts for the International Sale of Goods’ (1998), Kluwer Law International Pace ed. (1999), 53-54. Available online at <http://www.osgoode.yorku.ca/cisg/writings/ziegelfour.htm >.

12The Law Reform Commission (Ireland), ‘Report on Debt Collection: Retention of Title, p 16. Available online at <http://www.lawreform.ie/publications/data/volume7/lrc_51.html>.

13Oberlandesgericht Koblenz decision from 16.01.1992, 5 U 534/91, RIW 1992, 1019-1021). Summary available online at <http://cisgw3.law.pace.edu/cases/920116g1.html>.

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The English and Australian Approach

In England, the case of Aluminium Industry Vaassen BV v Romalpa Aluminium Ltd.14 confirmed that sellers can retain title in goods despite passing both possession and risk for those goods to the buyer. In fact, the decision went one step further and held that a ROT clause may be extended to provide that where goods subject to the clause are on-sold by the buyer, the proceeds of the sale may be held on trust for the supplier. That is, based on the establishment of a fiduciary relationship between the buyer (agent) and seller (principle), the equitable remedy of tracing can be granted.

The legal basis upon which Romalpa was decided was the English Sale of Goods Act.15 In particular, s 20 provides that title passes upon delivery, but reserves the right for parties to ‘agree otherwise’. As such, parties can contractually agree that title is to pass at a later or earlier date than delivery. Similarly, in Australia, each state government has implemented sale of goods legislation which closely follows the English approach.16 As a result, Romalpa represents the current Australian approach for dealing with ROTs as well.

However, the development of the law on retaining title grew in complexity in the years following the decision in Romalpa. For example, as Denis Ong notes, the position where the seller’s goods are mixed with other goods in the course of manufacturing by the buyer creates problems for a simple retention of title clause.17 The issue becomes whether the seller can claim title over the newly manufactured goods, and if so, to what extent?

This matter was addressed in the English case of Borden v Scottish Timber Products.18 In Borden, the Court held that the supplier maintained title to the goods supplied up until the point of its manufacturing. However, when the supplied goods were no longer ascertainable (after being mixed with other goods in the manufacturing process) ‘title to the [supplied goods] became meaningless’.19 In such a case, a simple retention of title clause becomes ineffective in protecting a sellers interest. The Court highlighted that for the seller to retain an interest in the goods after they were used in manufacturing process, the contract must have provided so.

14[1976] 1 WLR 676. Hereinafter Romalpa.

15The Sale of Goods Act 1973 (UK). The Act consolidates the Sale of Goods Act 1893 (UK)

16See for example The Sale of Goods Act 1896 (Qld), s 20.

17Denis S. K Ong, ‘Romalpa Clauses’ Bond Law Review, Vol.4 [1992], Iss. 2, Art. 5.

18[1981] CL 25. Hereinafter Borden.

19Ibid, per Templeman LJ.

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The subsequent issue courts were faced with was to determine if proceeds from a sale of the manufactured goods could be claimed by the seller upon the buyer’s insolvency. This was at issue in Re Peachdart.20 In Peachdart, the seller, having learned from Borden's case, purported to retain title over not just the goods supplied, but also any manufactured product made with his supplied goods.

The problem the court faced was that, based on the contract, it could not establish a fiduciary duty as in the case of Romalpa, where goods were on-sold on behalf of the seller (i.e. an agency relationship). Therefore, the equitable remedy of tracing the proceeds from selling the final manufactured goods could not be granted. Specifically, no fiduciary duty was established because under the contract, the buyer was able to deal with the manufactured goods as it saw fit, without direction from the seller. Likewise, no obligation arose to keep the profits from the sale of the goods in separate bank accounts.

The Mere Charge Argument

Despite the contract’s wording suggesting otherwise, the Court found that the parties must have intended to create a ‘mere charge’ over the goods. In Peachdart’s case, because the seller had not registered the so called charge in accordance with the companies legislation, the seller lost their preferential claim over the goods and proceeds from the sale of the manufacturing.

The mere charge argument was subsequently overturned in Clough Mill v Martin21. The Court held that there could be no charge created by the buyer over the goods because it had received nothing over which it could grant a charge. That is, the seller cannot have a charge over goods that it already owns.

As a result of the English court abandoning the mere charge ruling, the present law in both England and Australia allows sellers to retain title to manufactured goods and trace proceeds without having to register their security interest as a charge. This is a sharp contrast to other legal systems (discussed below).

20[1983] 3 All ER 204. Hereinafter Peachdart.

21[1985] 1 WLR 111. Hereinafter Clough Mill.

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