commercial law Cases

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Case Summary of Re Bond Worth Ltd [1980] Ch 228 CD

Introduction

The case of Re Bond Worth Ltd1 should be considered in the context of the law relating to the passing of property, and also in relation to th epari passu principles of recovery ininsolvency. Section 17 of the Sale of Goods Act (SGA) 1979 provides that property in specific and ascertained goods will pass when the parties intend it to pass. This will often be upon the delivery of the goods. However, the seller may wish to avoid this state of affairs, as there will be the risk that the buyer becomes insolvent prior to paying the seller. The pari passu principle would then apply such that the seller would have no priority over the goods, as they would simply form part of the insolvent buyer's estate.2

In order to avoid this, a seller may attempt to make use of a retention of title clause. Such a clause is a contractual agreement relating to the time at which property in the goods is to pass.3The parties may stipulate that the seller reserves title in, and the right to disposal of, the goods until payment has been made.4For example, in the case of Romalpa5 the Court of Appeal recognised the ability of a seller to utilie such a clause to retain the property rights in the goods, and also to claim over the proceeds of sale of the goods.

Issues

The case of Re Bond Worth involved theuse by the seller of goods a clause which purported to "equitable and beneficial ownership" of the goods in question. The issue for the Court was whether the clause, which was stated to have effect both over the goods themselves and over products manufactured using the goods, amounted to a bare trust or a floating charge which would be void for lack of registration.

Facts

Bond Worth was in the business of manufacturing and selling carpets. It had granted a floating charge over its property to a bank. Monsanto provided fibre on account to Bond Worth for carpet manufacturing. When Bond Worth later found itself in financial difficulties, a substantial amount of fibre had not been paid for and the account was outstanding.

A term had been inserted into the contract between the parties that the 'equitable and beneficial' ownership of the goods should remain with Monsanto until payment or resale. Upon the latter, the 'beneficial entitlement' was to attach to the proceeds of resale. The clause further stated that "should the goods become constituents of or be converted into other products while subject to our equitable and beneficial ownership we shall have the equitable and beneficial ownership in such other products as if they were solely and simply the goods..."6

Upon the insolvency of the company muchof the fibre had been processed, through dying and/or combining with other materials, into yarn. In turn, some of the yarn had then be used to manufacture carpets.

Outcome

The court considered that the relevant clause had been incorporated into the contract. However, unlike in relation to a successful retention of title clause, the clause purported to govern the equitable and beneficial ownership, rather than the legal ownership, of the goods. Therefore, legal property in the goods passed on delivery. Title had not been retained. In contrast, the judge (Slade J) considered that all elements of a charge existed. As such, the clause would only have legal effect if it had been registered as a charge pursuant to what are now sections 860 and 874 of the Companies Act 2006. The result was that Monsanto could not take priority over thefibre, yarn or carpets (or proceeds of sale from which) and the goods were part of the estate subject to the floating charge held by the bank.

Impact

Two aspects of Re Bond Worth have had particular impact in the field of commercial law. Firstly, it is now clear that retention of title must amount to a retention of legal, rather than merely equitable, title. This may be relatively easily cured by appropriate wording in contracts.

Of potentially more interest is the second way in which Re Bond Worth has been interpreted. This aspect is the way in which retention of title clauses operate in relation to mixed or processed goods.Although the retention of title failed as a matter of law inRe Bond Worth,Slade J went on to consider what the effect would have been on the mixed product, had the clause been valid.It was considered that no title could be retained in goods which had lost their identity.7 As the company was free to deal with the fibre as it pleased, including by mixing it with other products in the manufacturing process, it could not properly be said that the seller had retained title.8

This aspect of Re Bond Worth was particularly important as Romalpa had left the issue of mixed goods somewhat undecided.9 However, further cases have cemented the correctness of this approach. In Borden (UK) Ltd v Scottish Timber Products Ltd10 resin was mixed with wood chippings to be made into chipboard. Although the seller had sought to retain property in the goods, the fact that the resin was to be used within two days and ceased to exist separately once it was used in the manufacturing process meant that the seller lost title to it.11 Similarly, in Re Peachdart Ltd12 the seller was unable to 'retain' title in leather once it was made into handbags. The leather ceased to exist in its own right. However, it should be noted that where the original product is not altered it may still be subject to retention of title, such as an engine which may be unbolted from a generating set.13

In conclusion, Re Bond Worth limited Romalpa by holding that once legal title in the goods has passed, reservation of an equitable interest indicates the creation of a charge. Furthermore, where the contract purports to retain title in a product created from the goods in question, this is in fact an attempt to retain something of more value than the original product. As such, it must take effect as a charge and is not a true retention of title clause.14 This has indeed been confirmed by subsequent case law.

Footnotes

1Re Bond Worth Ltd [1980] Ch 228

2K C F Loi, "Quistclose Trusts and Romalpa Clauses: Substance and Nemo Dat in Corporate Insolvency" (2012) LQR 412, 414

3N Ryder, M Griffiths and L Singh, Commercial Law: Principles and Policy (Cambridge University Press, 2012) p 121

4Loi (n2) 420

5Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 2 All ER 552

6Re Bond Worth 235-236

7Re Bond Worth 237

8Re Bond Worth 247

9P Dobson and R Stokes, Commercial Law (8th Edition, Sweet & Maxwell 2012) 3-043

10Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25

11M Phillips, "Retention of Title and Mixing – Exploding the Myth" (2007) Insolv Int 81, 82

12Re Peachdart Ltd [1984] Ch 131

13Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd [1984] 1 WLR 485

13L S Sealy and R J A Hooley, Commercial Law: Text, Cases, and Materials (4th Edition, Oxford University Press, 2009) p 458