Comparative analysis of the retention of title clause in contracts: analysis on a national and international level in the fight for registration
The subject of this dissertation is the retention of title clause (ROT) in Belgium, the United Kingdom and the European perspective. Retention of title is on the crossroads of several law themes. It involves contractual issues (questions on validity, contents, does it bind the parties), proprietary issues (opposability, protection of third parties, formal requirements) and insolvency issues (can the clause survive bankruptcy or insolvency in general).
The aim is to research the validity of clauses and the problems faced within these jurisdictions. More specifically, attention will be paid to the possibility of registration of the clauses and a possible future (and current) harmonization in Europe.
The reason for choosing the act of registration is the remarkable fact that (secured and unsecured) creditors during insolvency proceedings can be surprised by a sudden retention of title clause coming out of nowhere and steeling away the assets they need to get reimbursed. The question is one of opposability of the clause and the notice to other creditors. From a functional point of view, the Retention clauses have the same effect as a charge, so why don't they need the same formalities? As explained below, these jurisdictions asked similar questions when the retention clauses were created, questions on the veil of ignorance that was created and never taken away.
In this author's opinion, national and/or international registration of such clauses will benefit clarity in sales contracts between consumers and traders and even more so between traders themselves. This statement suggests that creditors are not always aware of the exact state of assets of their debtors and that third parties will be made aware thereof in order to limit the good faith exception.
In a nutshell, I will explain the retention of title clauses as they exist in Belgium and the United Kingdom (2). Then a brief overview of the problems faced in these jurisdictions will be dealt with to go on with registration and other contractual mechanisms as a solution (3). Finally, we will try to find out if harmonization within the European Union is possible (4). Conclusion (5). Bibliography (6).
The Retention Of Title Clause In The Different Jurisdictions
This section of the paper will contain a more descriptive overview of the retention of title clause with an emphasis on the validity, construction and effect in the different jurisdictions.
BELGIUM (Eigendomsvoorbehoud or réserve de propriété).
Concept of retention of title and qualification.
According to article 1583 of the Civil Code (further C.C.), the sale of goods between two or more parties will be concluded (and the buyer will automatically become owner) from the moment there is an agreement concerning the good and the price, even though the good has not been delivered yet nor the price paid. This rule does not however touch on public policy, so the parties are allowed to delay the transfer of property pending the completion of a specified term in the contract or following a fixed trade usage.
This means that the retention of title clauses, constructed in whatever way, will not impede the contract of sale being concluded. It is only the transfer of property that will be delayed, usually until the price is paid in full. The seller will, until this contractually defined moment, remain the proprietor of the goods and will consequently be able to recover them in case of non-payment or non-completion of other contractually agreed terms.
This begs the question as to what kind of term is represented in the retention of title clause. For a long time the question on the juridical nature was under debate in Belgium. First it was thought to be a condition precedent of the price to be paid in full.
According to article 1181 C.C. a condition precedent requires a future and uncertain event, or an event that already happened, but not yet known by the parties. This event, that in any case will be external to the contract, will then suspend the enforcement of the contract until the completion thereof. Is this definition applicable to payment as a condition precedent in a retention of title clause?
Payment in said contract will be a future event, but will not usually be an uncertain one, seen as the contract will only be concluded on the specification of the price.
It is now clear from the majority opinion that the retention of title clause in the contract represents a suspensive time period, where the transfer of property will take place for payment. Just as the specification of the price, the transfer of property is one of the essential components of the contract of sale, so it would not be justified to view it as a mere condition. The only thing the parties can agree on is delaying the transfer.
When looking at the validity of the retention of title clause, a distinction has to be made between the internal and external validity.
The internal validity is the validity as between the parties themselves. This should not create any critical problems since article 1583 C.C. states that the contract for the sale of goods is concluded between the parties from specification of good and price. Property will pass solo consensu and they are allowed to delay the transfer between themselves.
The external validity, the validity between the parties to the contract and third parties, underwent a drastic change during the nineties.
The original opinion, dating from an arrest of the Cour de Cassation of 1933, stated that the retention of title was not opposable to the creditors of the buyer in a situation of concursus. What this means is that in case of bankruptcy, simple bankruptcy or other forms of concursus, the seller who inserted the clause in the contract could not invoke it against the creditors of his buyer, making the clause useless in an external sense. As mentioned before, internally the clause remains valid.
The reason for this point of view was relatively simple. Articles 7 to 9 of the Mortgages Act 1804 determines the principle of equality among creditors (pari passu principle) and only the law can make exceptions to this principle (pas de privilege san texte or the legality principle).
One of these exceptions is article 20, 5° of the mortgages act, which protects the unpaid seller. Seen as this article does not protect the unpaid seller in case he wants to rescind the contract or let him exercise the right of recovery (revindication) after concursus, it would be against the pari passu principle to let the parties create their own preferential rights in a contract. To put it simple, the parties will not be allowed to trump the law and harm other creditors by inserting a retention of title clause into the contract. Procurator General Leclercq (1933, p.103) sees this as an element of the trust principle, creditors should be able to rely on the fact that the goods which are in the hands of the buyer actually belong to him. They should not be disturbed by an unknown clause created by the parties to the contract of sale. This ‘secret clause' could also give the creditors the impression that the buyer is solvent when he is actually not and thus create a veil of ignorance.
The current opinion concerning the retention of title clause was formed with the insertion of article 101 in the Bankruptcy Act 1997. This article recognises for the first time the validity of the retention of title clause in bankruptcy proceedings and with this article Belgium would finally join the rest of Europe. Other arguments beside the European unification were mostly of an economic nature. The opposability of the retention of clause would create a mechanism of prevention of bankruptcy on the side of seller and buyer. The seller would not exercise his right of recovery quite as quickly as before, because now he will be able to exercise the ROT notwithstanding the bankruptcy proceeding and this will safeguard the position of the buyer. The seller on the other hand will not be harmed by the bankruptcy of his buyer.
The fact that the retention of title has only been recognised in the bankruptcy act of 1997 and not for example in the Civil Code casted some doubt on its scope of application to the other situations of concursus. The majority opinion nevertheless extended the recognition to the other forms of concursus and it seems inevitable that the legislator gives this opinion legal status. In some way it already has given this opinion legal status by stating that article 4 of the Directive on combating late payments in commercial transactions did not need to be transposed into Belgian law, seen as it was assumed that article 101 of the Bankruptcy Act was already applicable to all forms of concursus.
In order for the retention of title clause to be recognised in concursus proceedings, the following conditions have to be satisfied:
The clause must be evidenced in writing at the time of delivery of the goods. This is merely a procedural requirement to make the retention of title opposable to third parties. There are no other requirements to the writing itself and the legislator did not foresee in any form of publication or registration.
The buyer must have actual possession of the goods.
It only concerns movable property,
the goods have to remain in their original condition ( in natura) which means that they should not have become fixtures or mixed with other movable property. Goods remain in their original condition if they are still identifiable as such.
the claim for recovery must be made before the court has accepted the claims of the other creditors (avant la clôture du procès-verbal de vérification des créances).
Risk and rights of seller and buyer.
The main principle when dealing with risk is res perit domino, meaning that the thing is lost to the owner. Seen as the buyer does not become owner of the good by virtue of the retention of title clause, the risk will stay with the proprietor of the good, being the seller. It will remain that way until the price has been paid in full or on the completion of another contractually agreed term.
It might seem odd that even though the seller no longer has possession of the good he will still bear all the risks. That is why it is very common, advisable and possible by way of consensualism to stipulate that the buyer will bear the risk from the moment of delivery, irrespective of the actual transfer of property. This appears to be a logical exception to the general principle of res perit domino seen as it is actually the buyer who is in possession of the good.
As it is the seller who remains the owner of the good, he will also retain the right of disposal to it. He will as such be able to transfer the good over to third parties and his creditors can seize it. The right of disposal of the seller is, on the other hand, limited. He transferred the good over to the buyer under a suspensive time period. This limit will have to be respected by the third parties or creditors who acquire rights over the goods ( nemo plus juris transferre potest quam ipse habet, Nemo dat quod non habet). In another way we can see it as a seller who has already disposed of the goods under a ROT clause and now does not really have any immediate right to dispose of the goods.
The buyer will become the unconditional owner of the goods when he pays the price. Before this time, he will be considered to be a detentor ( he who keeps the goods for someone else, with permission of the owner). He cannot be in possession of the goods in the legal sense of the word since that would mean that he was keeping the good for himself.
The rights the buyer has over the good will be modulated by the contract or by trade usages. By this contract or trade usages he will not be able to influence the rights third parties may have.
Extended retention of title.
The extended versions of the retention of title clauses never were accepted in Belgium. An all monies clause, product clause or a prolonged clause will have a valid internal effect as between the parties, but will lack the necessary external effect to make the retention clause opposable to third parties.
A proceeds clause, on the other hand, was not really necessary and does not even have to appear in the contract because of real subrogation. Real subrogation replaces the goods with the claim that arises from the sub-sale. The conditions therefore are a sale to a third party, a claim for money and non-payment of the purchase price. If these conditions are fulfilled, then the claim for the money that has been replaced by the good will be outside the concursus. In case of actual payment to the original buyer, the money will be mixed with his other assets and will, except in case the money still is identifiable, be lost to the creditor.
If these conditions have been fulfilled, then the ownership of the creditor of the goods will be replaced with the ownership of the claim on the sub-buyer.
ENGLAND ( Retention of title or Romalpa clause).
Concept of retention of title.
The goal of the retention of title clauses in England is the same as in Belgium, namely protecting the seller. He has the right to take back what still belongs to him in order to limit the extent of debt the debtor has toward the creditor. In this sense, the retention of title clause gives the seller the possibility of taking position above the secured creditor, which might seem a bit odd at times because it might be an invisible clause to this third party.
In England it all starts with sections 17 and 19 of the Sale of Goods Act 1979( further SOG). Article 17 SOG states that property for specific or ascertained goods will pass when the parties intend it to pass. This means that property will pass by determination of the contract, not conveyance. This contractual intention is a permissible protection for the seller when retaining property in the contract of sale.
If the contract does not provide such a time, property will pass when the contract is made. This prvision, elaborated in rule 1 of section18 SOG, only applies in the case of an unconditional contract for the sale of specific goods in a deliverable state.
Section 19 of the SOG then defines the actual reservation of the right of disposal, which is the retention of title. This section delays the transfer of property as described in section 18 SOG. Section 19 states:
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; and in such a case, notwithstanding the delivery of the goods to the buyer, or to a carrier or other bailee or custodier 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.
In short this section provides that property will only pass upon the fulfillment of payment or any other condition imposed in the contract.
The turning point in case law for the retention of title came with the decision of the Court of Appeal in Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd. Since then, the retention of title clauses are more commonly referred to as Romalpa clauses.
The facts of the case are the following: a Dutch plaintiff, seller, (Vaassen) supplied the defendant (Romalpa) a certain amount of aluminium foil. The terms of the contract stated that property in the aluminium foil would only be transferred when all sums owed to the supplier were be paid. The buyer, on the other hand, was allowed to use them in production and sell them on as new products to a sub-buyer on the condition that the buyers would assign their rights against said sub-buyers to the seller.
Due to financial difficulties of the buyers, a receiver had to be appointed and now the issue of the Romalpa clause became very important. It was decided that the plaintiff was entitled to the foil still in the hands of the buyer and a part of the proceeds from the sub sale already received by the defendant.
A consequence of the retention of title is that property will not pass on to the buyer. Both legal and equitable title of the goods will remain with the seller until the fulfillment of the agreed conditions. Risk, in contrast to property, will pass on from the moment of delivery (unless otherwise agreed upon) and the seller may retain the action for the price of the goods.
Means of security.
As mentioned above, the seller with a retention of title clause will take priority over secured creditors in case of insolvency because the seller will not just have a security interest in the good, but he will retain ownership. From the point of view of the other creditors and the receiver though, the economic effect of the retention clause will be that of a charge.
The difference between the Romalpa clause and the security interest will be one of form mainly. Romalpa simply requires a term in the contract, whereas a charge usually requires the heavier burden of registration in order to be enforceable. More specifically, the charge has to be delivered to the Registrar of companies for registration within 21 days after the date of creation of the charge.
As will be explained below, there is always the danger that the retention of title clause will receive the qualification of a charge and will be unenforceable due to non-registration.
Types of Romalpa clauses.
England, as many other jurisdictions has different types of Romalpa clauses and their validity will often depend on the way they are constructed. In some cases the purported Romalpa clause may be considered a registrable charge.
There are 5 main types of Romalpa clauses, each one with a different effect and construction.
The different types are:
The simple clause. This is the Romalpa clause in its purest form, where the seller retains ownership until the full payment of price and obtains superpriority towards other creditors. The validity of such a clause has been confirmed by the Court of Appeal in Clough Mill v Martin. Registration is not required.
All monies clause. The seller retains ownership until the price of the good and all other sums owed to the seller are paid in full. The seller has superpriority for all debts and registration is not required. This clause has received approval from the House of Lords in Armour v Thyssen Edelstahlwerke AG. The benefit of using this clause is that you don't have to distinguish whether have been paid for or not to recover them.
Proceeds clause. Here we have to make distinction between disposal by the buyer with and without authority. If the buyer disposes of the goods without authority from the seller, the seller may recover the proceeds of the sub-sale whether this was agreed upon or not. If the contract does not mention anything, it will be assumed that the proceeds belong to the buyer and he is a debtor to the seller for the outstanding price.
If the buyer acts with authority and has the obligation to account for the proceeds, the seller acquires a proprietary right for the proceeds. There is a very real danger here that this clause will be seen as a charge and consequently void for non-registration.
Proceeds clauses will for this reason generally fail to uphold in court.
In English law there is only few decisions recognising a proceeds clause in its purest form, the Romalpa case being one of them. This might suggest that the decision made in that case was erroneous or a least poorly elaborated.
Products clause. This clause provides that if the goods are mixed with or incorporated into other goods, the retention of title will be extended to the whole of the goods until payment in full. It cannot be upheld that this is a true retention of title, seen as the seller was never the real owner of the goods added.
From a practical point of view these clauses are rarely effective because they will be qualified as a chattel mortgage, which has to be registered. There is an exception when the goods concerned can easily be removed from the end product. In this case, the seller with a retention of title clause will still be the owner even though the goods were incorporated.
If the buyer mixes the goods without authority from the seller, this will create a situation of a co-ownership, even if the contract was silent on this point.
The prolonged clause. This clause, which wants to extend the retention of title to the sub-buyer, will clash with the right conferred to the sub-buyer by section 25 SOG. By virtue of this section, the buyer can pass good title to the sub-buyer in good faith (and without notice) and the actual seller can no longer claim ownership despite the retention of title clause.
In short, simple retention and all moneys clauses will be effective in court, whereas proceeds and products clauses will often be construed as registrable, but unregistered charges and thus void.
According to Iwan Davies (1999, pp. 128-129) a retention of title clause should contain the following elements:
(1) He who possesses the goods should be described as a commissions agent and the resale of the goods will be anticipated.
(2) On the actual resale the buyer, possessor should be expressed as selling as principal.
(3) the contract should have an provision concerning the proceeds and these proceeds should be kept separate and identifiable.
(4) A provision concerning the passing of risk and an obligation to insure should be expressed. Ancillary rights, e.g. the right of access and the right of removal of the good, should also be included.
(5) when the contract deals with fungible goods, mixed with other goods , a provision for tenancy in common should be included.
(6) In case of commingling and manufacturing goods, the nature of the relationship should be expressed in bailment for commodity processing terms to avoid a necessary registration as a charge.
Loss of title
The seller who relies on a retention of title clause will none the less lose this title if the goods change identity. This can happen when the goods get destroyed, incorporated into a building or annexed as fixtures, attached to other goods, mixed in with other goods whilst they retain there physical characteristics or commingled with other goods forming a whole new product. Title will also be lost in case of art. 25 SOG (SUPRA)
Problems Faced In These Different Jurisdictions And The Possible Solution Of Registration.
The main issue at hand here is that in every jurisdiction mentioned there is some form of not knowing who the goods belong to. The purchaser seems to be the real owner because of his possession, but in fact the retention of title clause prevents the transfer of the goods. It's this veil of ignorance that might become a problem when the purchaser becomes insolvent and even when the purchaser decides to sell the goods to a third party. The third party probably bought the goods in good faith, so he shouldn't be the one bearing the risk.
The central thesis of this dissertation will be proving that contractual provisions and the registration of the goods will improve the situation of the seller and sub-buyers. Every party needs to have some certainty as to whom the goods belong and the sub-buyer needs to be safeguarded against any claims from the head seller.
Protecting the creditor (seller).
In 1997, the Belgian legal system changed opinion over the external effects of a retention of title clause (art. 101 Bankruptcy Act 1997). From now on the retention of title clause would be effective in case of insolvency proceedings overthrowing the earlier decision of the Belgian Cour de Cassation of 1933. This change is to be applauded because Belgium was one of the last countries to accept the legality of this legal figure in Europe and this brings us one step closer to a more general harmonization of the retention of title.
On the other hand, the spirit of the arrest of 1933 mentioned one important reason for not accepting the clause in insolvency proceedings emphasised by Procurator General Leclercq (1933, p.103). In the view of the court and Procurator General, accepting this figure would harm an essential principle in Belgian law, namely the trust principle. Creditors should not be disturbed by a third party claiming to have title to the good when the good is clearly in possession of their debtor. This would create an apparent solvency of the buyer, misleading the creditor of the true nature of his financial status.
There is quite a lot of doctrine that questions this line of reasoning. They state that it might not be as realistic as it used to be to assume that all the commercial products and machinery are actually owned by the trader. As alluring as this view might be, it still does not solve the problem of the veil of ignorance created by the retention of title clause. Creditors don't necessarily have to assume de jure that the goods belong to the buyer, but de facto they will still behave that way out of convenience.
Although the former arrest is antiquated it had a good point about the apparent status of the debtor and this concern is nowhere to be found in the new legislation. The only publicity requirement to make the clause opposable to third parties is the fact that the clause must be evidenced in writing at the time of delivery. Other forms of security all foresee in different ways to make them opposable to third parties, e.g. deposition of the invoice at the Registry, caution in the land register for the pledge of a business, giving the good out of hand for a normal pledge, …
Dirix and Storme (1995) also criticised the new provision and suggested setting up a uniform register, which would allow for legal certainty and transparency. They immediately emphasised the need for a new provision in the Mortgages Act in favour of a more general form of publicity and registration. Even during the parliamentary discussions the possibility of registration was recommended, but later rejected because then the retention of title clause would be seen as a privilege instead of the mere application of the erga omnes character of property, meaning that property is an absolute right that can be claimed against all other parties. The reason for doing this was to stay true to the spirit of the draft text. This draft saw retention of title as a aspect of property instead of as a privilege. The retention of title was even compared to leasing as not being a privilege, but even in leasing there were serious doubts about whether or not to create a system for publication as evidenced by a royal decree of 1967.
In this author's opinion it is a mistake to see retention of title merely in terms of property. Contrary to the philosophy of the draft text, the majority opinion of the doctrine treats retention of title amongst sureties and privileges and it is time that the legislator starts accepting the same view. If this view were to be adopted, there would be no political and philosophical obstacles in setting up a central register for retention of title clauses and other similar sureties or privileges. This would not only benefit the creditors in deciding whether to extend credit, but would also ameliorate transparency for other people dealing with the detentor of the good, e.g. the sub-purchaser. From another point of view, it would be possible that way to ensure the legal certainty that Belgian had under the old view of non-opposability and still accept the modern view seeking access to the rest of Europe.
Secondly and from a more contractual angle, we can see that silent acceptance of retention of title has not been possible. The reason for this must be that the clause in writing is the only means to be sure that the clause is opposable to third parties. When thinking about this requirement, the legislator seems to have forgotten that the opposability mainly concerns third parties and not the parties to the contract. Even without evidence in writing the clause will be internally valid. It seems very unreasonable not to inform third parties of what is really going on with the assets of their debtor when extending credit. Some of the doctrine thinks that a silent acceptance should be possible. This should not be misinterpreted though. What they mean is simply that it should be possible to put the retention of title clause in the invoice, correspondence or other contractual documents and this will only be accepted if the other party has actual knowledge of the clause.
Thirdly, when we look at the possibility of inserting a retention of title clause in a contract of sale of immovable property, the clause will still be valid from an internal point of view, but to make it opposable to third parties the ROT must be inscribed in the mortgage registry. The division made between movable and immovable property stems from the historic conception of property. Only real estate gave wealth, economic, political and social power. From this perspective, movable property was worthless. When taking a look from a modern angle, we can see that this criterion is no longer valid, on the contrary, movables are worth far more than the immovables. This was even true at the time of creation of the Civil Code. Due to some fysiocratic philosophy and political lobbying, the old criterion was maintained in the C.C.
Retention of title from the perspective of the sub-buyer.
This aspect involves the appearance of a third person. Firstly we have the original contract of sale between the creditor (seller) and the debtor (buyer). Sometimes, and it can be quite common in sales transactions, the buyer can only get the funds needed to pay the seller by first selling the goods, which have usually undergone some kind of change. The third person he sells the goods to (sub-buyer) will not always know the provenance and the actual status of the goods.
The original buyer has, as mentioned before, the right of detention, which means keeping the good for someone else. It also signifies that he is not the owner of the good and has, by consequence, no right to dispose of the goods. He does not even enjoy the protection of article 2279 C.C. This articles states that in relation to movable property, possession counts as title when you are dealing in good faith. Seen as he can never in good faith claim to hold the good for himself during the workings of the ROT clause, he will not enjoy its protection.
So until the buyer pays the purchase price in full, he will not obtain any right in rem.
Seen as this causes problems in funding the original sales transaction, it will probably be advisable to the parties to contractually prevent problems occurring and taking into account the requirements of the retention of title clause.
When no contractual provisions are set up to sell on the protected goods, it might occur that, even when not allowed, the buyer will enter into a contract for sub-sale. The question now is, that since it is not legal for the seller to enter into another sales contract, how will the original seller be protected?
To start off, we must acknowledge that the sub-contract is voidable (1599 C.C.). This voidability is however only relative, meaning that only certain protected people can claim it. These protected people are specified by the respective law provisions and in this case, the protected person to the contract is the sub-buyer himself. The original seller, not being privy to the contract (1165 C.C.), has no legal right to avoid the contract.
In aforementioned situation, the seller in capacity as owner can only try to recover his property. This might seem like a very adequate means of protection for the seller, but will be unduly harsh for the sub-buyer. Chances are he never found out about the fact that someone else was the actual owner, or he might not even care about who the proprietor is. That is why the recovery of movable property under ordinary law will be prevented by article 2279 C.C. (possession counts as title). Good faith, which will be presumed (2268 C.C.), will protect the sub-buyer from losing possession.
he situation created by the current legal provisions is insufficient, it will be unduly harsh on the creditor and will complicate life for the sub-buyer, even though the latter enjoys the benefit of article 2279 C.C. This is the reason why the legal provisions must change, first and foremost, a provision must be inserted in favour of registration of the goods concerned. In dealings between private individuals it might not have an enormous impact, but it will be different when dealing with traders in the normal course of businesses. That is why the creation of a means of registering goods under retention of title should be encouraged among private individuals, but obligatory between traders and businesses.
By creating a registry, there is one fundamental thing that will alter the use of a retention of title clause drastically, namely article 2279 C.C. When goods are registered, there will be no more (presumption of) good faith. In dealing with private individuals who did register and traders and businesses that are obliged to do it, the third party will have the responsibility of checking the register and will be aware of the sureties encumbering the goods. This will give the creditor the opportunity to recover his good without bumping into article 2279 C.C. and it will create a transparent environment for third parties contracting with the buyer.
The situation of disabling article 2279 C.C. is not entirely new. The condition of good faith in article 2279 C.C. can be undermined in current law in two ways.
First is the actual knowledge of the third party. This will immediately disable the good faith requirement. Although, there are some questions when the third party has actual knowledge without any further information. Will he always loose the benefit of article 2279 C.C. or will he be able to rely on and presume the consent of the original seller who will loose the possibility of recovery? Another problem with this kind of solution is proving the third parties' actual knowledge, which will be insurmountable in most cases. A third difficulty will be when the retention clause is mentioned within the second sale contract, but no further information on the topic is provided generating an uncertain situation for the sub-buyer.
A second way of undermining 2279 C.C. and one which is more directly relevant to the suggested solution is the way in which good faith should be viewed. There is a growing number of doctrine and jurisprudence saying that the good faith requirement should be approached in a more objective and normative way. This means that not only actual knowledge, but also constructive notice should be paid attention to. This is evidenced by the fact that in the past, professional buyers and other sub-buyers who usually include retention of title clauses have a had a harder time invoking article 2279 C.C. These special kind of third parties are well versed in the trade practices and they should know what is going on with the assets of their sellers because they have the obligation to investigate. Consequently it will not be easy for them to claim they were in good faith when dealing with the goods under a retention of title clause. Seen as this first step was already taken, it should not be too hard to imagine that a special registry would be a great benefit in obtaining transparency for all the parties involved. The legislator shouldn't be afraid of taking it.
Other ways to deal with the problems concerning the retention of title clauses.
Another way to protect the seller of goods under an ROT clause is by invoking article 1188 C.C. This section of the Civil Code deals with time provisions in contractual obligations. It states that the debtor can no longer invoke the advantage of the agreed time provision if he went bankrupt or if he diminished the contractually offered surety by his own doing. In lay terms it means that if the buyer sells the goods on or goes bankrupt, the seller will be able to claim the price immediately.
This can prove to be a very efficient provision for the seller, but only if the buyer is not yet insolvent. In practice it is easy to foresee that problems will mostly occur when the buyer has no means of paying the seller and so this provision will inevitably be of small practical use.
A second possibility is to generalise a standard clause in the contract of sale which obliges parties to reveal the origin and title of the goods and the obligation to put this clause in any subsequent sales contract. This will place more responsibilities on the buyer and will make sure that the sub-buyer knows if the buyer is selling the goods on with authority from the seller or not.
from a political viewpoint is imaginable that this might be difficult, because it will set a higher standard of investigation on the parties and cost a lot more, resulting in a very unpopular decision. From the perspective of transparency and legal certainty it might prove to be a giant leap forward though.
A third possibility and one which has been encouraged from the start is to insert an individual contractual provision arranging all the aspects already mentioned. This on the other hand will disadvantage parties without experience and small businesses who will not always remember to do this.
It is clear that in England too the secured and unsecured creditors can be disadvantaged by creating a retention of title. Both of them would benefit and be protected by giving information about the debtor's financial status at the time when credit is advanced, because the retention of title clause will reduce their securities, either by property claims or by priority over other creditors.
Here too, like the Belgian example, there is a risk for sellers and third parties of creating a system for false wealth (apparent solvency) which could be remedied by a system of registration and notice. The register can show the state of the assets in the buyer's possession and the notice can serve as a warning to creditors of the buyer that he is making a purchase under a retention of title. This way, they will be informed and the problem of false wealth won't be an issue. Now these creditors can make an informed decision whether to extend more credit or not.
Types of Romalpa clauses.
Seen as there are different types of Romalpa clauses, it might be best to analyse them separately. The distinctions is very important because of enforceability and the necessity of registration in order to become enforceable.
A. Simple clause.
According to Gullifer (2007, pp. 294-295), a simple retention of title clause gives the seller his interest by reservation instead of a grant and cannot be a registrable security interest. This means the interest is opposable and can be enforced against all third parties without any other requirements and with automatic superpriority. Consequently, the seller won't be able to trace the proceeds to a further sale unless he contractually arranges it to be so (beware of the trap of a charge, being void for lack of registration).
It is clear now that the simple clause does not represent a registrable security interest, but the problem of false wealth remains the same. I believe that consequently the possibility of a registry for these ‘types of securities' should not be excluded. Besides the argument of false wealth, transparency and legal certainty, we can see that the article 9 UCC jurisdictions make it obligatory to register every interest with security function. This can become a model for (supra)national systems in obtaining a manageable transparency.
B. All monies clauses.
As accepted by the House of Lords in Armour v Thyssen Edelstahlwerke AG, this type of retention of title clause is valid and no registration is required. The validity of the all monies clause is derived from the freedom of contract. When thinking about validity and freedom of contract, it seems that consideration for third parties has disappeared. How can the creation of an all monies clause be based solely on contractual freedom when it affects third parties in such a drastic way. It is understandable that the creditor (seller) receives and deserves protection for the credit he has extended to the buyer under the form of the Romalpa clause, but this should only be accepted if it does not directly harm other parties and this goal can be achieved by registering these goods.
Furthermore, a clause creating a kind of security for all debts, even ones completely unconnected with the goods at hand and even debts from a long period before, generates a situation of complete legal uncertainty about the goods. A third party dealing with the buyer should be able to confirm the status of the goods in stead of just relying on the buyers' sincerity. A registry would be able to monitor the number of debts and the amount, giving the third party all the information he needs to contract with transparency and legal certainty.
C. Proceeds clause.
As mentioned before (SUPRA), one of the only cases where the proceeds clause was accepted in its true form (unregistered) was the Romalpa case. What happens in the case of a proceeds clause is the following. Because the buyer sells on the good, the seller loses the advantage of the retention of title clause in theory. The rights that a seller can have and claim on the proceeds of said sale can only come from the buyer himself by creating a security interest. By being a security interest, it has to undergo the obligation of registration set up by the Companies Act 1985. Otherwise it will not be opposable to third parties and can consequently not be enforced against them. Because of the type of clause, a seller will not usually go trough the trouble of registering, leaving the clause without effect. If he does register the clause, he will create a charge which loses its general superpriority, making it a lot less attractive. In case of registration, the first party giving notice to the buyer will have priority.
D. Products clause
In the products clause, where the goods are enriched, or by adding elements or by undergoing a manufacturing process, the fact remains that a new product is created which can only be owned by its maker (buyer). Once again, the only rights the seller can use are rights granted by the buyer under the form of a registrable security. The same reasoning as for the proceeds clause will apply here. As mentioned before though, there is an exception in case the goods can be detached and retain their essential integrity.
When looking at these different types of clauses and their problems with enforceability, it is no wonder that this field of law is called a minefield that is too complex to oversee.
Romalpa as a security?
When asking the question whether or not to make registration obligatory for retention of title clauses, one must ask the question if it is a security or not. In Armour v Thyssen Edelstahlwerke AG the House of Lords decided that Romalpa clauses weren't securities and as a result weren't subject to registration. The predominant voice in this case was Lord Keith of Kinkel. His narrow view on securities was the following: a security is created when the debtor gives rights over the goods, in which he retains ownership, to the creditor, making it possible for the latter to claim his rights. When putting this in the perspective of a Romalpa clause, it must be acknowledged that the buyer does not ‘retain' ownership over the goods nor is there a transfer of any rights to the creditor, seen as he never lost ownership. Consequently, the Romalpa clause is not a security.
In a specific part of Armour v Thyssen Edelstahlwerke AG , even Lord Keith admitted that the retention of title clause gives the seller a security for the unpaid debts of the buyer, but he later negated this in a legal sense by stating that the surplus value in case of a security must be accounted for, but not so in case of a Romalpa clause.
Yet when we look at the case of Singer v. Williams, every Romalpa clause is a security as described by Viscount Cave. In a broad definition of securities, he sees it as ‘a debt or claim for payment which is secured in some way' and the Romalpa clause falls under this very broad definition.
In 1989, amendments were suggested to the Companies Act that if brought into force would have changed things drastically. But even when not into force it gave an indication of the political view at the time. The change suggested also concerned amongst others article 395 (2) of the Companies Act insomuch that a charge would comprise any form of security or interest over property, except those arising by operation of law. For this reason, the Romalpa clause would have been a registrable charge if the amendments were accepted.
Romalpa clauses in insolvency proceedings.
The aim of insolvency law is to distribute assets amongst the creditors in a fair and equitable manner. The ROT clause, on the other hand, disrupts this pattern by giving the seller the right to recover his property even though he was no longer in possession of the asset. In other words, it upsets the rules of priority set up by the Insolvency legislation. As Jones (1986, 238) stated, ‘a Romalpa clause is in reality just another security interest, so it seems absurd to have an elaborate system of rules regarding registration of charges which can be avoided by this simple device. The priority rules are there for a reason and it is usually not legal to legally ignore these rules without any registration or other forms of publicity.
S. 17 of the Sale of Goods Act allows for parties to defer the transfer of property until a later stage, as it should because this deferral grants the seller an necessary protection of his extension of credit. On the one hand, this might have the effect that the actual implementation of these reservations clauses seriously hacks in on the assets of the buyer in case of insolvency. On the other hand, if other sellers get wind of this conditional sale, they might be deterred from extending any more credit. This has been described above as false wealth or the appearance of insolvency. The balance that is maintained between allowing ROT clauses in their current state and deterring the use is a delicate one that has to be monitored on both sides.
Some authors, like Tribe (2001, pp. 2-4) believe that the use of retention of title clauses is morally justified because it prevents buyers from defaulting payment later and using the goods to pay of other debts. What he did not really take into account at this stage though is the fact that other players might be involved too. When taking a look from the sellers' point of view it is hard to disagree with the opinion of Tribe, because it is the ultimate way of protecting and securing your advance without having to worry about anybody else and without going trough the troubles of registering. If on the other hand a register was created, information will be granted to all the parties doing business with the seller and securing all their interests. One can say that this information might jeopardise the future credit of the buyer, but in this author's view that is just a consequence of the financial status of the buyer himself. It would create a more transparent situation that might drastically influence the debts of the buyer to start with.
The ultimate trap in using Romalpa clauses is the question if you are still dealing with a Romalpa or are dealing instead with a registrable charge. This balance, as evidenced by the vast case law, has always been a delicate one that has been at the center of litigation.
A possible solution for this trap is the generalization of registration as a means of obtaining enforceability, as suggested by the Crowther Committee and the Cork Report. Especially the Cork Report made a very sensible statement saying that contractual freedom should not be curtailed more than is necessary seen as it is one of the ground rules English law, but this freedom can and should be curtailed in the interest of society and other parties. The burden created this way of registering for every single contract might be circumvented by creating a single filing system that entails all sale contracts between the two parties.
European Harmonization And Registration.
Seen as many trade opportunities pose themselves in an European and international context, it will be important to look for any solutions that might be used on a supranational scale. Much is to say here for the American UCC model (article 9). Under art. 9 UCC , sellers have the obligation to acquire a signed document from the buyer evidencing the security and its subject matter, which will then be filed in a public office. This will protect potential creditors and other third parties dealing with the debtor.
When looking for European or international harmonisation, attention must be paid to various international treaties and conventions. The Vienna Convention on the international sale of goods (CISG) oddly enough does not mention rules concerning the transfer of property and as to this day, there are no uniform European Union laws in relation to the retention of title, so solutions must be looked for elsewhere.
Recognising that there is a necessary limit to this paper, the solutions on a European level will only be dealt with in outline.
Draft Common Frame of Reference, outline edition (further DCFR).
Book nine of the newly released DCFR deals with the subject of proprietary security in movable assets. When achieving effectiveness against third parties, several methods are suggested, amongst others registration and possession of the assets by the secured creditor (section IX-3: 102).
More specifically, section IX-3:301 deals with European registration. It has to be noted here that this system for registration does not make a distinction between ROT mechanisms and security rights and in this respect it will be closer to an art 9 UCC approach. The DCFR will even denominate ROT's as a security right.
The whole goal of this section is to set up a workable system for registration and the access to it.
Recognising the status of this instrument, but also its limitations, we see that this is not a definite step in coming to a system of registration. On the other hand, it will be a lot harder now refusing the position that has virtually been adopted by the European Union. It will surely have an impact on future legislation and will, according to this author be the biggest impetus towards a transparent framework for retention of title devices (and ‘other security mechanisms').
European Insolvency Regulation.
On the 31 of may 2002, the European Insolvency Regulation (EIR) came into force, with the goal of ameliorating transnational insolvency procedures in the European Union and improving the internal market to avoid forum shopping. As a regulation, it will have automatic effect, overriding conflicting national law where necessary.
The Insolvency Regulation is not set up as a provider of uniform substantive law, but instead codifies the way a member state determines jurisdiction to open an insolvency procedure. It also tries to impose a uniform approach to the choice of law. From that point on, it is usually the procedural rules of the member state that will apply.
The insolvency procedures will, unless the Regulation states otherwise, be ruled by the law of the country where the proceedings are started ( lex concursus, art 4.1 EIR) and once these main proceedings have started be effective on the territory of the EU. Exceptions to this rule are granted for security rights in rem and retention of title clauses, which are not seen as a security right in rem (respectively art. 5 and 7 EIR). These exceptions are ruled by the lex rei sitae, where the goods are situated.
Art. 7 EIR reads as follows:
Reservation of title
1. The opening of insolvency proceedings against the purchaser of an asset shall not affect the seller's rights based on a reservation of title where at the time of the opening of proceedings the asset is situated within the territory of a Member State other than the State of opening of proceedings.
2. The opening of insolvency proceedings against the seller of an asset, after delivery of the asset, shall not constitute grounds for rescinding or terminating the sale and shall not prevent the purchaser from acquiring title where at the time of the opening of proceedings the asset sold is situated within the territory of a Member State other than the State of the opening of proceedings.
Most member states of the European Union nowadays have retention of title clauses that can withstand insolvency proceedings. There are big differences though as to formalities, publicity, extensions,… For that reason, the European legislator worked out uniform rules for referral without creating substantive law (renvoi is excluded from these uniform rules for referral). It has been noted by the majority of commentators that this provision is only applicable to simple retention of title clauses notwithstanding the possibility that other clauses can be protected by article 5 (third parties' rights in rem).
The second part of article 7 does contain a piece of substantive law. This was possible because of the great convergence on this topic within the European Union. This section of article 7 deals with the insolvency of the seller himself. It states that his insolvency will not be ground for rescission or termination of the contract and cannot prevent the buyer from obtaining a good title. This thus prevents the good of being incorporated into the seller's estate. When looking at the retention of title clause as a conditional term and the fulfillment of that condition as the moment of transfer of property, the question could not have been answered any other way seen as the buyer already is a ‘conditional owner'. In this respect he is attributed with a quasi right in rem.
Directive on combating late payments in commercial transactions.
This Directive, which contains a section on retention of title clauses brings recognition of simple foreign retention of title clauses in business contracts. The aim of this Directive is to discourage the financially attractive practice of late payment in business transactions by means of contractual, proprietary and procedural means.
The draft directive on late payment, which was not accepted, was trying to establish a simple retention of title clause enforceable across Europe. It foresaw a low level of formality. The parties were to agree upon the retention of title before the actual delivery, but other formalities were expressly excluded. It also declared the retention clause enforceable against third parties, even in insolvency proceedings. Finally the directive let the member states decide on how to protect third parties acting in good faith and whether or not to adopt extended clauses.
The current provision reads as follows:
Retention of title
1. Member States shall provide in conformity with the applicable national provisions designated by private international law that the seller retains title to goods until they are fully paid for if a retention of title clause has been expressly agreed between the buyer and the seller before the delivery of the goods.
2. Member States may adopt or retain provisions dealing with down payments already made by the debtor.
This provisions has lost a lot of its former glory. The main loss has been the disappearance of the opposability in insolvency proceedings, destroying the possibility of a viable standard for a simple retention of title in Europe. The clause will be once again regulated in accordance with national terms (private international law). The only upside is that it will be upheld and recognized if valid in accordance with these national provisions. According to Milo (2003, p. 392), this directive imposes the obligation on member states to have a national retention of title. In my opinion, this statement goes a bridge too far. It is simply said that when a retention of title is at hand, it should be recognized. Nothing in the text suggests otherwise.
Not accepting the draft version of this directive will in my opinion prove to be a missed chance to reform the retention of title clause on a European level. This provision, if adopted, would have been a breakthrough for Europe, because it was finally possible to make a European retention of title clause breaking away from the formalities and intricacies of national adaptations. Not only would this provision have saved a lot of money in cross border business transactions, but it would have also set a standard for simple retention of title clauses which could have seriously changed the use and form of the national variant. From this standard, the logical next step would have been securing transparency and legal certainty within the European boundaries, be it by a form of registration or other forms of notification.
The conclusion is that diversity and consequently uncertainty remain the main issues in property law across Europe. The unwillingness of the European council in this respect has set us back for at least another couple of years.
For an international approach regarding the retention of title clause, you might want to take a look at the UNCITRAL Legislative Guide on Secured Transactions.
Viewing the retention of title from various angles, it is the author's submission that a total registration requirement like suggested by article 9 UCC would be the preferential way to go. As indicated before, this might seem like an onerous and costly thing to do, but in my view it is a necessary and logical step to take to safeguard not only third parties, but both parties to the contract itself. If this step is not taken, the national and especially the supra national framework of ROT clauses will become unworkable. Hence, the contractual freedom on which this legal figure is based, must be curbed in order to achieve transparency and legal certainty. The best way of achieving these goals is in my view the registration on a national and preferably European and international level.
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