The Romalpa Case: Signpost or Diversion?

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The Romalpa Case: Signpost or Diversion? The supply of goods on credit is a commercial commonplace. Foreseeable difficulties will however arise where the buyer withholds payment or, more seriously, is unable to make payment due to solvency difficulties. The difficulty when a company is forced into liquidation or an individual into bankruptcy was summarised by Templeman LJ[1]: “…unsecured creditors rank after preferential creditors, mortgagees and the holders of floating charges and they receive a raw deal.” It is therefore prudent for sellers to insert into the terms of their contract a retention of title clause whereby ownership of the goods remains vested in the seller until payment. This apparently uncontroversial proposition was lent a unique twist in Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd[2] in which the Court of Appeal was required to consider a situation in which goods were supplied and used or resold prior to payment. In Romalpa a Dutch Company supplied a quantities of aluminium foil to and English company pursuant to a contract which provided that the foil would remain the property of the former until all debts payable by the latter were discharged. The contract expressly provided for the assignment of rights to payment in the situation in which products were manufactured from the foil and sold but did not expressly deal with the situation in which the foil itself was simply sold on. When this occurred and the English company went into liquidation, the seller of the foil attempted to recover monies paid in respect of the foil to the Receiver. It was held that the parties must have intended there to be a right to sell on the foil and that a fiduciary relationship was thereby created as a result of which the Dutch company was entitled to the proceeds of sale. Therefore the use of reservations allowing the seller to recover the proceeds of sale of goods or the value of products manufactured from them became widespread and known eponymously as “Romalpa Clauses”. Criticism of such contractual devices has been advanced by commentators such as Bradgate[3]: “The widespread use of retention of title clauses has potentially serious consequences for secured creditors: a successful claim under a retention of title clause allows the supplier to reclaim the goods, their proceeds or product, and the pool of assets available to meet the claims of other creditors is thereby diminished.” However, of greater concern to suppliers and their banks is the fact that Romalpa appears not to have been regarded by the Court of Appeal as a particularly significant decision (leave to appeal to the House of Lords was refused) and subsequent cases have been left to turn on their particular facts. Thus in Re Bond Worth Ltd[4], it was held by Slade J that the reservation of title clause gave rise to a charge rather than retention of tile in the goods. However, in Clough Mill Ltd v Geoffrey Martin[5] a consideration of the particular clause used led the Court of Appeal to the conclusion that the contract prevented property from passing so there was nothing to charge. Further difficulties arise as a result of the nature of the manufacturing process. Where the character of the goods has been altered (see, for example, Model Board Limited v Outerbox Ltd[6] where cardboard was printed upon and made up into boxes) and Borden (UK) Ltd v Scottish Timber Products Ltd [7]in which resin was used in the manufacture of chipboard). In such instances the courts appear to have been defeated by the difficulty of quantifying the nature and extent of the original seller’s interest in the new product. A solution to this might be to allow the validity of express provisions rendering the new product the property of the original supplier until payment. However, since the value of the new product will undoubtedly exceed the value of the supplied raw materials which contributed only in part to its manufacture, retention of title in the whole of the new goods would be inequitable if not unworkable in any event. Thus the current state of the law is unsatisfactory for two principal reasons: despite the apparently authoritative status of the decision which has since 1976 lent its name to retention of title clauses, Romalpa failed to supply a formula upon which suppliers could rely with confidence in order to protect their interests; as a result, cases continue to turn upon their individual facts leading Staughton J in Hendy Lennox Ltd v Graham Puttick Engines Ltd[8] to describe this area of law as “a maze if not a minefield”. It might be supposed that this state of affairs could be remedied by legislation providing precisely for the rights of sellers who purport to protect themselves in this way. However, whether the solution thus opted for provided security by way of a charge or some comparable remedy or reinforced the concept of wholesale retention of title in goods, the difficulties of quantification and providing a remedy which was equitable to both seller and purchaser would remain in all but the most straightforward of cases. It is submitted that the answer lies in the a mechanism for the registration of interests as suggested by both the English[9] and indeed the Irish[10] Law Commissions. A system of registration of interests would allow transparency (particularly for the benefit of creditors) as to the priorities which would apply in the event of insolvency. Thus retention of title clauses could be registered at Companies’ House or a similar institution. Any clause not so registered would be void in the event of the winding-up or bankruptcy of the buyer but where there was valid registration, the interest would take priority over interests in the goods created subsequently to the date of registration. Such a reform would assist both sellers and their banks by providing a clear and readily enforceable means of recovering the value of property sold on condition that title does not pass until payment. Bibliography Bradgate, R., Commercial Law, (3rd Ed. 2003) Oughton, D. & Lowry, J., Textbook on Consumer Law, (2nd Ed., 2000) Treitel, G., The Law of Contract, (11th Ed., 2003) Law Commission, Consultation Paper No.164, Registration of Security Interests: Company Charges and Property Other than Land, (July 2002) Law Reform Commission (Ireland), Report LRC 28 of 1989, Report on Debt Collection: (2) Retention of Title Westlaw

Footnotes

[1] Borden (UK) Ltd v Scottish Timber Products [1981] Ch 25 [2] [1976] 1 WLR 676 [3] Bradgate, R., Commercial Law, (3rd Ed. 2003), pp.450-1 [4] [1980] Ch 228 [5] [1984] 1 All ER 721 [6] [1993] BCLC [7] [1981] Ch 25 [8] [1984] 1 WLR 485 [9] Consultation Paper No.164, Registration of Security Interests: Company Charges and Property Other than Land, (July 2002) [10] Report LRC 28 of 1989, Report on Debt Collection: (2) Retention of Title
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