If you supply goods, there will always be a concern that you will deliver them but not be paid.

Retention of title clauses can be an important tool in ensuring your business retains ownership of the goods until the buyer pays, even after it has taken delivery.

In a period of continued financial strain, these clauses (alongside other tools such as guarantees, set-off provisions and taking security) can provide a level of insulation against the unexpected insolvency of a customer or downstream supplier. However, two recent cases have highlighted the difficulty in predicting what the effect of such clauses might be.

The effect of retention of title clauses is thrown into sharp relief in circumstances where the buyer sells the goods on to a third party before paying for them in full. If the third party pays the original buyer but the original buyer does not pay the seller, the court can be left with a difficult task.

The third party will argue it has paid for the goods and should therefore obtain title to them. The original seller will argue it has not been paid and will rely on its retention of title clause. How the law resolves these claims depends upon fine distinctions in the terms of the retention of title clause.

Retention of title denies an action for the price of goods

In Wilson v Holt, the Court of Appeal decided that a retention of title clause had been effective. However, as a result, it found that the seller of goods had no claim against the buyer who had sold those goods onwards to its subsidiary.

Wilson’s contract provided that it would retain ownership of goods until they were paid for in full. The buyer (Holt) sold the goods on to its subsidiary as permitted by the contract but then failed to pay Wilson. Wilson sued for the price of the goods.

Under the Sale of Goods Act either the invoice for those goods must specify a date for payment or the title to the goods must have passed to the buyer before an action to recover the price of the goods is possible. The parties had not agreed a specific date for payment of the invoices and consequently (in an odd reversal of fortune) Wilson argued that it’s retention of title clause was ineffective, that title to goods had passed to the Holt and that it could consequently sue for the prices.

The court disagreed. In its view, the retention of title clause had worked and consequently no action for price was possible. As Holt no longer had the goods, Wilson were left with no obvious remedy. As well as a lesson to all of the benefits of stipulating a certain date for payment in invoices this is a warning about the nature of retention of goods clauses.

The court couldn’t agree exactly what the legal situation in this scenario was. It was not clear whether the actual effect of the retention of title clause was to create a contract between Wilson and the subsidiary who bought from Holt or not. The case has been given permission to proceed to the Supreme Court which may in due course resolve this point.

Retention of title works…but only just

Days later, in Fadallah v Pollak, the High Court decided a retention of title clause had worked in favour of the original owner (Mr Pollak), despite storage of the goods in the buyer’s (Eagle Power’s) warehouse and onward sale to a third party: Mr Fadallah.

Eagle, had actually been the original owner of the goods, but sold them to Pollak. Pollak did not have his own storage facilities so Eagle stored them although, crucially, Pollak attended to watch them being transported to Eagle’s warehouse.

Eagle subsequently found another buyer for the same goods, Fadallah, and agreed with Pollak to repurchase them on his standard terms and conditions, which included a retention of title clause. After Fadallah had paid for the goods, Eagle went into administration without paying Pollak.

The court held that Pollak’s retention of title clause had worked and Fadallah therefore had no title to the goods, despite paying for them. However, this outcome appeared to turn on the apparently fortuitous fact that by being present at Eagle’s warehouse when the goods were delivered, Pollak was deemed to have taken possession of the goods.

If he had not, the clause might have given rise to a different outcome and the goods may have been Fadallah’s.

These fine distinctions and the different approaches of the judges in the Court of Appeal highlight the difficulties with retention of title clauses. Although the reasoning in the courts in these cases is difficult to decipher, one message is clear: retention of title clauses remain a complex topic and their effect will not necessarily be in line with companies’ expectations. Businesses should consider them but do so alongside other forms of protection.