Romalpa and Subsequent Cases by a Great Deal of Confusion - Essay Example

Romalpa and Subsequent Cases by a Great Deal of Confusion Introduction For a long period of time, the legal obligations of both the buyers and sellers, particularly with the sale of goods contract, has been been strictly based on the Sale of Goods Act 1893. Even though the Sale of Goods Act 1893 was created and passed by the Parliament to serve as the common law when solving cases related to the sale of goods, a lot of previous cases show that the said legislation was not in accordance to other similar existing statute such as the Bills of Exchange Act 18821. For this reason, the UK Parliament decided to pass the new Sale of Goods Act in 1979 after the process of undergoing a series of amendments2. The past and current cases related to the sale of goods are moslty decided based on the specific rules and guidelines that are stipulated under the general contract law. Under s 16 of the Sale of Goods Act 1979, it was clearly stated that “where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods arc ascertained”3, 4. Even though the Sale of Goods Act has been widely used in the development of modern commercial contracts, some sections of the said Act does not contain adequate information whein it comes to dealing with cases related to the contracts of sale of goods. For example, each time a seller sells goods or raw materials to a manufacturer (buyer), the seller has the right to request for a protection over the risks wherein the buyer would be facing the risks of insolvency. Often times, this can be done when the seller reserves the right for the title of goods until such time that the ordered goods has been fully paid by the buyer. Even though s 24 of the Sale of Goods Act clearly stated that the seller can reserve their rights for the title of goods until such time that they receive the right payment (based on their agreed price and quantity), this section does not clearly explain the full purpose of the seller. With regards to the issue on termination and rejection rights of the sellers, the Sale of Goods Act 1979 presented only one (1) section with regards to the specific terms applicable when terminating the agreement5, 6. It is obvious that one (1) section under the Sale of Goods Act 1979 is not enough to present a detailed information with regards to the procedural requirements behind the termination rights of the seller. Lastly, even though the Sale of Goods Act 1979 clearly acknowledges the rights of unpaid seller over the traded goods7, 8, several studies explained that the use of the said Act alone is not sufficient in terms of deciding for all commercial cases9, 10. To address the gap with regards to the obligations of both the buyers and the sellers, the Romalpa clause a.k.a. “title retention clause” was purposely created11. The Romalpa clause is unique in the sense that the said clause contains a long-list of elements that the Sale of Goods Act failed to consider. Derived from the case of Aluminium Industrie Vaassen BV v Romalpa Auminum Ltd12, 13, 14, the main purpose of the Romalpa clause is to protect the sellers from cases wherein the buyers would file a bankruptcy15, 16. As a common knowledge, the act of selling goods on credit entails the risks of being unpaid at the time when the buyer would end-up filing bankruptcy17. Due to the limitations of the Sale of Goods Act in 1979, commercial lawyers today are obliged to incorporate the retention of title clause in all the other statutes used in commercial law (i.e. Sale of Goods Act 1979, Companies Act 2006, and the Uniform Commercial Code, etc.) whenever necessary. It means that through the use of Romalpa clause, the seller will have the legal right to reposses the goods sold to the buyer in case the buyer becomes insolvent. The process of using the retention of title clauses can lead to a great deal of confusion when solving cases concerning the sale of goods. Therefore, this study will purposely analyze and discuss how the retention of title clause and the subsequent cases has created a great deal of confusion within the UK legal system. Eventually, this study will make use of several past and current cases as evidents that the courts’ decision with regards to commercial law has been realistic or pragmatic. Basically, going through the main discussion is important in terms of making sure that all commercial lawyers will gain full understanding on how the court is using the retention title clauses when making the final judgment on cases related to the sale of goods. Discussion Earlier, it was mentioned that the seller the legal right to reposses the goods sold to the buyer in case the buyer failed to pay the agreed cost of goods sold18, 19. As a rule, the title of goods will remain at the possession of the seller until the title of goods is passed to the buyer after completing the payment20, 21. Although the goods were already delivered to the buyers22, 23, the main purpose of the Romalpa clause is to make the seller able to retain their right over the title of unpaid goods until such time that the buyer is able to pay for the agreed price. However, its application is limited. Aside from the fact that the said clause is not applicable to services rendered to a customer or any other consumable goods24, the effectiveness behind the use of the title retention clause can be highly dependent on the nature of goods sold. The case of the Indian Oil Corporation Ltd v Greenstone Shipping S.A. – The Ypatianna25, 26, 27, 28 is a good example of a case wherein the nature of goods sold has to be considered when solving the case. After transporting some crude oil from U.S.S.R. to India, the Indian Oil Corporation legally sued Greenstone Shipping company for mixing the crude oil with other crude oil that was left from the previous voyage and discharging less oil based on the quantity stated on the bill of lading (i.e. 507,977 bbls of crude oil based on the bill of lading quantity vs. 503,896 bbls of crude oil as quantity discharged). Even though the remaining pumpable oil after discharging the crude oil was 9,545 bbls, the judges argued that it is reasonable to give the shipping company a tolerance level of 0.55% due to unavoidable losses from admixture and evaporation. Therefore, the Indian Oil Corporation was entitled to receive an award for the damages caused by 1,287.13 bbls shortage as compared to the company’s claim of 9,545 bbls of crude oil. Hendy Lennox v Grahame Puttick Ltd29 is a good example wherein the Ramalpa clause was very much applicable in the case. Under this particular case, the unpaid raw materials were diesel engines that was already used in the manufacturing of diesel generating sets. Since the unpaid diesel engines can be easily identified based on its serial number, the court decided that the buyer should immediately disconnect and remove all unpaid diesel engines from the diesel generating sets and return the unpaid items to the seller. Based on this particular case, it is clear that the application of the Ramalpa clause is possible on goods that can retain its identity at the time wherein the buyer becomes insolvent30. There are also uncontrollable situations wherein raw materials sold by the seller has already been used in the buyers’ manufacturing line. The fact that title retention clause will give the seller the legal right to reposses only the unpaid goods they have sold to the buyer makes it difficult on the part of the jury to retain the right of the seller over the unpaid raw materials that has already been incorporated into the manufacturing of another product. The Borden (UK) Ltd v Scottish Timber Products31 and the Modelboard Ltd v Outer Box Ltd32 are among the few good examples of cases wherein the seller’s right over the title of goods sold was lost right after the raw materials that were delivered to the buyer has been used in the process of manufacturing another product33, 34. In UK, the four different types of consensual security include: a mortgage, pleges, equitable charges, or contractual liens35. By securing “charges”, the seller will be able to retain their right over property and the right to sell the property under certain conditions36, 37. In the case of Borden (UK) Ltd v Scottish Timber Products, the seller of resin did not bother to secure the registration of a “charge”. Furthermore, the seller also did not clearly express in a contract its interest over the proceeds in the selling of chipboards38. For this reason, the seller of resin holds no right to the actual selling of the chipboards39. Since the seller’s reservation of the title expires at the time the resin was used in the manufacturing of the chipboard40, the absence of a “charge” registration can make the seller become an unsecured creditor41, 42. In the case of Modelboard Ltd v Outer Box Ltd, the judge decided that the process of converting the cardboard sheets into boxes is more than enough not to be able to retain the supplier’s right over the title of the unpaid cardboard sheets43, 44. Therefore, the concept of Romalpa clause is again void. Other similar cases wherein the identity of the product sold was lost in the process of manufacturing include: IC New Zealand v Agnew45 wherein the unpaid plastic pellets was used in the manufacturing of plastic container, Ian Chrisholm Textiles v Griffiths46 wherein the unpaid textiles were used in the manufacturing of dresses, and the Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd47 wherein the unpaid supply of steel were used in the manufacturing of pressure vessels. Considering these three (3) cases, it was made clear that the sellers are at risks of losing their title over the unpaid products each time the products they delivered to the buyer has lost its essential character48 or each time the unpaid goods has been incorporated with other third party suppliers49. Re Bond Worth Ltd50 is a case wherein the company received the delivery of fibres from Monsanto on a consignment basis. In this case, Monsanto clearly stated in the contract that the “equitable and beneficial ownership” will remain on the part of the seller until such time that the Bond Worth Ltd has settled the full payment with the company51, 52. Monsanto also managed to write in the contract that the company will reserve the right over the finished goods in case Bond Worth Ltd failed to settle their payment obligation. Since Monsanto failed to obtain a registration for charge before the case was filed, Slade J concludes that Monsanto does not have the legal right over the selling of the carpets53, 54, 55. For this reason, it was agreed upon that the proceeds coming from the sub-sales has to be kept in a separate account to preserve its identification56. Under s 2(1) of the Sale of Goods Act 1979, it was clearly stated that “a contract of sale of goods is a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price”57. However, not all selling of goods can happen solely between a buyer and a seller. In some cases, the buyer of the original seller can be in the position to re-sell the goods bought from the original seller (i.e. hire purchase agreement). It means that the process of applying the context of retention of title clauses can be void. Even though the buyer has not yet fully paid the seller, there are special cases wherein the buyer has the right to re-sell the unpaid goods they received from the original seller. When this happens, question such as whether or not the original seller of goods is at risk of losing his right over the title of goods despite using the Romalpa clause could arise? To answer this question, it is necessary to closely examine the case of Re Peachdart58. On the ground that the leather will remain a property of the seller until such time that the leather is fully paid, the case of Re Peachdart is all about a supplier of leather that has delivered some raw materials to a manufacturer of handbags. In this case, the buyer was given the contractual agreement to resell the leather and/or the handbags that were made out of the leather provided that a portion of the sales or resale proceeds will be given back to the supplier59. Although it was made clear that all of the unused leather within the possession of the buyer remains a property of the seller, the buyer was able to contest the seller’s claim over the sales proceeds of the handbags. It means that the supplier of leather failed to claim their rights over the buyers’ handbags60. Eventually, Vinelott J also made it clear that “as soon as work began on raw leather to make it into a handbag, the title to that leather would be transferred from the seller to the buyer”61. It means that the seller would eventually lose the title over the unpaid goods. Specifically the case of Re Peachdart is another good example wherein the judge’s decision has made some violation with regards to the actual construction of the Romalpa clause62, 63. The main objective of the said clause is to retain the title of goods on the part of the seller until the goods are fully paid. Although it was made clear that the main purpose of Romalpa clause is to secure the seller from the inability of the buyers to pay the goods they received from the supplier, Vinelott J’s decision that the title of goods should be “transferred from the seller to the buyer” immediately after the unpaid goods has been used in the manufacturing of another goods directly violates the main purpose of the clause which is to protect the seller from the risks of being unpaid. Such decision made by Vinelott J is very confusing in the sense that the process of transferring the title of goods from the seller to the buyer leaves the unpaid seller unprotected from insolvent buyers64. When analyzing the application of the Romalpa clause alone, one can easily conclude that the courts’ decisions made with regards to the retention of title clause can trigger a great confusion not only on the part of the local companies but also to some commercial lawyers who are unfamiliar with the accepted commercial law practices in UK. For instance, there is no unversally known statutory requirement for Romalpa clauses to be registered. However, the court keeps on repeating that there is a need for the seller to register for charges in order for them to be protected on certain claims65, 66, 67. Under s 17 and 19 of the Sale of Goods Act, it was clearly explained that the contracting parties such as in the case of the buyers and sellers have the statutory freedom to decide when the title should pass. However, the courts’ decision to make all unregistered Romalpa clauses ineffective at the time the buyers become insolvent totally violates the statutory right of the buyers and sellers to decide when the title should pass68. To be able to understand that the courts’ decision with regards to commercial law has been realistic or pragmatic, it is necessary to re-examine and pay close attention to the legal concept behind the security interest in England69. Based on the generally accepted legal practice in UK, companies who wish to gain consensual security are required to secure either pledges, charges, contractual liens, or mortgages70. Under the English law, companies who wish to be protected from the buyers’ insolvency are required to make a registration for certain charges71. Since the UK law recognizes only pledges, charges, contractual liens, or mortgages as a form of consensual security, failure to secure any of these four (4) types of consensual security will automatically put the unpaid seller at risks even though they have the option to use the Romalpa clause in the court. This clearly explains why the judges’ decision always points out the importance of being able to make a registration for charges way before the legal charges against the insolvent buyers has been made. It means that sellers who failed to comply with this particular English law requirements automatically makes them an unsecured creditor. Conclusion Based on the cases presented earlier, it is clear that there are specific grounds which can make the Romalpa clause void. Among the common grounds include: failure to secure registration for chages, in cases wherein the essential character of the unpaid goods is lost, or when the unpaid raw materials are used in the manufacturing of another product that contains other raw materials coming from a third party supplier. Even though the concept of Romalpa clause seems to pretty straight-forward and simple, its application within the legal practice can trigger the development of confusion to some company lawyers. Nevertheless, the courts’ decision with regards to the integration of Romalpa clauses in commercial law has been realistic or pragmatic. Rather than paying close attention to the Romalpa clause alone, the court simply requires all practicing commercial lawyers to re-examine and pay close attention to the accepted legal practices behind the security interest in England72. Therefore, to protect the sellers from the risks of becoming an unsecured creditor, commercial lawyers should immediately advice the sellers to obtain registration for charges under certain conditions. References Adams T, Chris Beanland, Ceri Evans, & Patrick Hubble, Business and Consumer Transactions: Law and Practice (3rd edn, Oxford University Press 2008). Ahdar RJ, Romalpa’s Empire; the reception of reservation of title clauses in New Zealand. LMCLQ (1993) 383. Bridge M, The Sale of Goods (Oxford University Press 1997). Bridge M, Macdonald RA, Simmonds RL, & Walsh C, ‘Formalism, Functionalism and Understanding the Law of Secured Transactions’ (1999) 44 McGll LJ 567. Carter JW, ‘Party Autonomy and Statutory Regulation: Sale of Goods’ (1993) 6 Journal of Contract Law 93. Coltman L, ‘A practical guide to retention of title claims’ Hill Hofstetter LLP. 2009 accessed 18 December 2012 Connolly M, Briefcase On Commercial Law. 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