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Retention of Title Clauses

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Retention Of Title Clauses

The Sale of Goods Act 1896 (Qld) permits a seller to retain the property in the goods sold under a contract of sale until certain conditions imposed by the seller are fulfilled. Such a right is not implied or inferred, and therefore, has to be stipulated in the contract of sale. If the contract does not contain an agreement as to when the ownership in goods is to pass from the seller to buyer, then the ownership is deemed to be transferred upon delivery of the goods to the buyer notwithstanding whether the purchase price has been paid in full or not.

Retention of Titles clauses are particularly useful when selling goods in the case of a buyer becoming insolvent.  Generally, the seller would not be able to recover the sale price, or any balance of it, if the corporate buyer becomes insolvent or has a receiver appointed. In these circumstances, as the goods are considered to be the property of the buyer and not the seller, the seller would become the buyer’s unsecured creditor and, depending on the circumstances, the goods may be sold by the buyer’s trustee, liquidator, administrator or receiver.

In order to protect the seller in circumstances where a corporate buyer becomes insolvent after delivery of the goods but before the goods have been paid for in full, it has become increasingly common for the seller to insert a condition into a contract of sale whereby the property in the goods sold is retained by the seller until the full price has been paid. Such clauses are known as the retention of title or Romalpa clauses. Upon the buyer becoming insolvent, the seller can rely on those contractual provisions and “rescue” their goods or payment for the goods from falling into the hands of the buyer’s secured creditors.

In addition to simply providing that the property in the goods is to be retained by the seller until the goods have been paid for in full, the seller may wish to extend the operation of a retention of title clause by stipulating that:

• The property in the goods is not to pass to the buyer until the buyer pays all moneys owing to the seller and not just the purchase price;
• The seller is to retain the property in the goods where the buyer re-sells the goods to any sub-buyer;
• The seller is to obtain title to the proceeds of any on-sale by the buyer (this clause will need to be drafted as a trust which, in turn, will only be effective if the goods can be sufficiently identified, i.e. they did not become part of a new product; fiduciary relationship between the parties must also be established);
• The seller is to obtain title to any new product which the goods supplied become part of until the buyer’s indebtedness to the seller is fully discharged.

The effectiveness of the retention of title clauses depends heavily upon the precise wording of such clauses, therefore care must be taken to have them professionally drafted. When implemented correctly, the Romalpa clauses provide protection to an unpaid seller from losing their goods and payment in circumstances where a corporate buyer becomes insolvent.

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