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Retention of Title clauses – are they effective?
12 December 2010

A retention of title clause (“ROT”), is a provision often included in a supply contract which seeks to ensure that title in the goods does not pass from the supplier to the purchaser until payment has been received. An “all monies” ROT goes further than that since it seeks to retain title in the goods until all monies for the goods in question plus any other monies owed to the supplier are paid, thereby increasing the protection afforded to suppliers. However, it is important to ensure that the ROT corresponds with the general purpose of the contract and the nature of the business being carried out.

In the recent High Court case of Bulbinder Singh Sandhu (trading as Isher Fashions UK) v Jet Star Retail Ltd t/a Mark One (In Administration) and others [2010] EWHC B17, Jet Star had contracted with Isher for the supply of goods for Jet Star’s immediate resale to customers. The terms of the contract permitted Jet Star to sell stock purchased from Isher onto customers before payment had been made in respect of that stock or indeed any other stock supplied. An entire agreement provision within the contract allowed this arrangement to continue in the event of insolvency of Jet Star.

Jet Star were placed into administration and Isher demanded immediate payment of all monies owed in respect of stock supplied. Importantly, however, Isher did not terminate the contract or seek to locate and recover any of their stock once the administrators were appointed. Instead, in seeking to rely on the “all monies” ROT, Isher sought to claim monies to the value of the funds generated during the period of administration trading.

Although the ROT had been successfully incorporated into the contract, the court found the clause to be ineffective on the basis that its operation would have been inconsistent with the contract as a whole. Of significance was the fact that the parties had contracted for the supply of stock for resale rather than the supply of stock for Jet Star’s own use, giving Jet Star the right to sell and pass title in the stock to its customers. Another deciding factor for the court was that Isher had sought to rely on the ROT to recover monies to the value of the proceeds of sale of the stock rather than the recovery of the stock itself. On the whole the ROT had not been drafted in a way that took account of the complete context of the contract and the court was not prepared to re-write it to cover any set of circumstances that may have arisen.

Practice Points

This case emphasises the need for suppliers to ensure consistency between the terms of any agreement and any ROT that they may later wish to rely on.  The existence of an ROT alone may not provide sufficient protection to a supplier where it is not clear when its operation should be triggered. It is also an important reminder to suppliers that an ROT is not security for payment but a means of recovering goods supplied where payment for them is not received.  However, this does not afford the supplier any right to priority over proceeds of sale where a purchaser becomes insolvent. Where there are other creditors they will all simply have to form an orderly queue. 

 For more information about this case or to find out more about how the Dispute Resolution team can help you please contact Ally Tow on 0118 952 7206 or email [email protected].

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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