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Title retention clause or Romalpa Clause is a clausal part of a contract of sale of goods whereby in certain conditions, the buyer of the goods does not become the legal owner of a good until he fulfils a specific condition. Mostly, such clauses are used in contracts of buying-selling on credit whereby the seller of the goods retains the ownership of the good until the buyer pays in full. Sale of Goods Act, 1930 permits the retainment of ownership of a good even after the said good has been purchased and delivered to the buyer, as long as the contract between them specifically states that both parties agree to give effect to such a clause in the contract. These said clauses are mostly in writing and registered for them to have the due effect of placing the seller in priority over other creditors which might have a registered security interest in the said goods. It is used in situations whereby a seller does not wish to transfer the ownership of goods to the buyer until the buyer pays for the good in full.

The basis of a Romalpa Clause or Title Retention Clause is the s25(1) of the Sale of Goods Act, which allows the parties to a contract to mutually decide amongst themselves at what stage is the ownership of goods to be passed to the buyer. These are of supreme importance in the commercial transaction as on one hand, they give the seller priority of title to the goods over other mortgages and claimants on the buyer’s assets if he/she was to go into liquidation as these won’t operate on goods that do not belong to the buyer and on the other hand, it allows the buyer to buy goods without immediate payment in full and in conditions where the seller is not ready to supply goods but for the addition of Romalpa clauses.

Analysis

Romalpa clauses, otherwise referred to as Reservation of Title clauses took birth as a tool to save the sellers from non-payment of the goods that they sold in the event of the buyer becoming insolvent. S 25. Of the Sale of Goods Act, 1930 encompasses the same concept.

“25. Reservation of right of disposal- (1) Where there is a contract for the sale of specific goods or where goods are subsequently appropriated to the contract, the seller may, by the terms of the contract or appropriation, reserve the right of disposal of the goods until certain conditions are fulfilled. In such case, notwithstanding the delivery of the goods to a buyer or to a carrier or other bailee for the purpose of transmission to the buyer, the property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled.”

The aforementioned section was inserted verbatim from the Sale of Goods Act, 1893 of the United Kingdoms. This being a relatively new doctrine in the commercial transactions sparse number of cases have been adjudicated in India and mostly, Indian Courts, adjudicating on the subject have relied the English law.

In any commercial transaction, involving title retention clause, four types of such clauses can possibly be involved. A simple title retention clause, as the name suggests, basically involves the retention of the ownership by the seller over goods which have been delivered to and are in possession of the buyer and lying unused in their original format.

Rising in complexity are the title retention clauses whereby the goods supplied by the seller are altered or used to manufacture other goods by the buyer (colloquially called ‘products clause’).Further, there are title retention clause whereby the goods (altered or unaltered) in possession of buyer are sold off to third parties (‘sub-purchasers’) by the buyer and lastly are the ‘all monies’ clauses wherein the ownership of the goods remains with the seller until the buyer clears all antecedent debts that he owes to the seller of the goods.[1]

These clauses come off as deceptively simple in principle but there are a lot of problems that they carry in the association. The concept of Retention of Title clauses had been long-awaited and anticipated in the English law, whereby in the case of McEntire v Crossley [2], these clauses were associated with the contractual freedom accorded to citizens in a laissez-faire economy.

However, the major development of Jurisprudence around Romalpa clauses originates from – One of the first time these clauses were discussed in the landmark case of  Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd.[3] The case, relating to insolvency law discussed the issues relating to title retention clauses and the priority of creditors in the events of a buyer’s estate or company winding up. Briefly, the case involved the plaintiff (seller – Aluminium Industrie Vaassen BV) supplying aluminium foil to the defendant (buyer- Romalpa Aluminium Ltd.) on terms (or a title retention clause) that the ownership of the foil (whether later altered by the seller or not) was to remain with the seller and would not be transferred to the buyer until all debts owed to it by the buyer had been paid off. The goods made by altering the original goods were to be kept by the buyers as bailees, separately from other stock. An implied power had been accorded to the buyer to resell the unmixed foil and an express power was accorded to resell the mixed foil. It was also provided that in events of such case, the original buyer would be deemed as the agent of the original seller to the sub-purchasers. Eventually, Romalpa (the buyer) went insolvent, and seller contended that its contract was effective to retain title to the goods, and therefore it did not need to share them with other creditors of the buyer in the process of liquidation.

The court (at prelim as well as appeals stage) held the retention of title clause to be effective in favour of seller. They opined that the seller still had the ownership of the aluminium foil, and could in fact as mater of right trace the price due to them into the proceeds of the sale of the finished goods, before and ahead of any of Romalpa’s unsecured and secured creditors. It was stated that,

“the intention of the parties was to create a fiduciary relationship thus enabling AIV to recover the proceeds of sale of the un-mixed foil under the principle the equitable remedy of tracing.”

In the subsequent decisions, this liberal position with respect to the retention of title clause, the charge created and the registration was made a lot constricted. In the case of Re Bond Worth Ltd.[4], opined that retention of title is nothing but a charge created in favour of the seller which are compulsorily registerable. The case of Compaq Computer Ltd. v Abercorn Group Ltd.[5] was also one of the first cases to deviate from the standards set up by Romalpa case. In the immediate case, the contract stated that

Insofar as the dealer may sell or dispose of the Compaq products or receive any monies from any third party in respect of Compaq products, he shall strictly account to Compaq for the full proceeds thereof (such monies as the dealer shall receive) as the seller’s bailee or agent and shall keep a separate account of all the proceeds or monies for such purpose.

The Court in its judgment took a purposive approach stating that in cases wherein any interest created on a property destructible on payment of any debt on that property is to be construed as creating a charge or mortgage.  The court interestingly denied accepting the Romalpa rationale. The case and its reasoning were used by the Gujrat High Court in the case of Asea Brown Boveri Ltd. v O.L. of Polysteels Ltd.[6]  In another, diverting case, that of Borden (U.K.) Ltd. v. Scottish Timber Products Ltd.[7] it was held that blending of seller’s goods with other goods into new products by an irreversible manufacturing process(even if discernible) destroy the identity of the goods as when they were supplied by the seller extinguish any right that the seller might hold on it with respect to title or charge on the goods unless and until the goods were subjected to a registrable charge on the goods or the proceeds. 

These judgments reveal a discontinuing pattern. It is seemingly the case that in similar factual circumstances, the court have adjudicated the matters relating to title retention clauses differently and on basis of their construction rather than following a linear principle of following precedents. The underlying trend seems to be suggesting that courts rely on subject matter or substance of the contract rather than the form and intention of the parties agreeing to title retention clauses and the very contract itself. Courts in some cases have even gone to the extent of appraising the finer facts of the case. In Henry Lennox Ltd v Grahame Puttick Ltd[8], the court whilst testing the enforceability of title retention clause, looked into the independent identity and capacity of the seller’s unsold goods in possession of the buyer (diesel engines incorporated into generators in this case) to be separable from the buyer’s own goods. The court opined that the title retention clause shall be enforceable by the seller as the diesel engines incorporated in the generators retained their independent identity and could be easily separated from the generators even though there was no condition from them to exist in a fashion that they should be discernible. Despite the huge variability in the jurisprudence around title retention clauses, a certain general principle followed by the majority of the courts can be narrowed down.

Firstly, simple title retention clauses, whereby the seller retains the possession as well as ownership of the goods do not presuppose a charge and don’t require registration and Secondly, goods of the seller when sold by the buyer (either by incorporating them into new products or partially completed goods that have been altered) to sub-purchasers presupposes a charge and all the proceeds require immediate registration. With respect to the cases where the Courts presupposed a charge on every good created from raw material purchased from the seller or goods sold off to sub-purchasers and presumed any debt that the buyer owed to the seller over and above other creditors of the buyers to be invalid against receivers, banks or other creditors unless registered. It is contested that charge is not created on all the goods manufactured in seller’s favour. It is advocated that the courts, going the way they are going now should also give complete legal recognition to title retention clauses, warranting the ownership of goods to be held by the seller. They should give intention and mutual mentality of the parties while forging the contract the primary reservations.

Keeping in mind the case laws and the legal principles laid down in the statutes, it is but logical to conclude that if a product or proceeds from selling a good to the sub-purchasers gets construed as a charge by the seller which has not been registered, then the seller inevitably loses his security and priority over the claim of other creditors in case the buyer was to go insolvent.

By itself, it is evident from the case laws (Borden[9]) that simple clauses by themselves do not constitute a charge.  Restating what was held in the case, the buyer in no circumstance can create a registrable charge because such charges can only be created by him in favour of seller if he owns the property (which he does not at this point of the transaction). Therefore, if the seller invokes a simple title retention clause in events of buyer still not having paid the price of the goods, the title of the goods remains with the seller and the sub-purchaser precludes form creating any sort of charge on the goods.

However, in the events wherein the original goods of the seller lose their identity due to them being incorporated into a new type of goods like raw material, the goods will have a separate and distinct title. The title retention clauses in these events adopt the identity of a charge which records an agreement amongst the parties as to who shall the title vest with.

The previous title retention clause unless supplemented with a new agreement (re-iterating the original intention of the parties in these changed circumstances) cannot be construed as creating a charge as the identity and title of the goods have changed. Same was iterated in the case of Clough Mill v Martin whereby it was accepted that in the aforementioned events, title retention clauses in no way compulsorily convert into a charge. The court observed that,

“[T]he buyer does not confer on the supplier an interest in the property defeasible upon payment of the debt; on the contrary when the new goods come into existence the property in them ipso facto vests in the [supplier pursuant to the products clause], and the [supplier] thereafter retains its ownership in them, in the same way and on the same terms as the [supplier] retains its ownership in the unused material.”[10]

In a nutshell, the title retention clause that ownership of the new product is to vest in the supplier and that his title would be indefeasible ceases to operate. In the obiter, it was observed that the original intention of the parties must be re-agreed upon in order to create a charge on the new goods in favour of the supplier.

Conclusion

Romalpa clauses remain one of the most important tools in commercial transactions. They hold to be good law and are the authority for the principle that an unpaid seller should be able to trace into proceeds of sale of the goods for the matters of equity and justice. Such relationship and equitable tracing, through a way of a fiduciary relationship, keeping in mind the true intentions of the parties while entering into the contract. These clauses owe their beginnings from Aluminium Industrie Vaassen B.V. v Romalpa Aluminium. They have been ordained with the status of being one of the most important judgements in the realm of commercial law of the century which gave birth to the concept of reservation of title in common law but the principles laid down in the case have been gradually diluted in their application by the judicial decisions.

The jurisprudence in this area is dicey at the moment but major principles can still be culled out from the present body of case laws and statutes and should indeed be relied upon by the court along with their judicial acumen to differentiate between situations wherever apt.


[1] William Davies, Romalpa thirty years on- still an enigma?, 4(2) Hert. L. J. 2, 4 (2012)

[2] [1895] AC 457

[3] [1976] 1 WLR 676.

[4] [1980] Ch. 228

[5] [1991] B.C.C. 484

[6] (2002) 4 GLR 3377

[7]   [1981] Ch. 225

[8] [1984] 1 WLR 485 at 493

[9]  [1981] Ch. 225

[10]  [1985] 1W.L.R. 111 at p. 119

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