Rules Concerned with the Drafting and Enforcement of Retention Clauses, Guarantees, and Indemnities - Coursework Example

Commercial Law Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecture Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 25th January, 2013 Introduction In commercial sale of good contracts there arise situations where the seller may need to reposses his goods if the buyer defaults on payment. Under English law, businesses are free to make sale of goods contract and include any terms they may deem necessary as long as those terms are within the confines of the law. In most contracts, retention clauses are included which specify when titles for the ownership of the goods pass on from the seller to the buyer. In most cases, the drafting of retention clauses in contract may mean they are not enforceable in law. It is therefore important for businesses to seek legal advice while drafting or trying to enforce retention clauses. In addition to retention clauses, Guarantees and indemnities are other instruments used in business transactions by sellers to ensure they will get payment for goods supplied on credit. Recovering goods sold on credit can be especially difficult where companies are going through liquidation or administration. This paper looks at the legal rules concerned with the drafting and enforcement of retention clauses, guarantees and indemnities. The paper looks at the legal position of Eva the majority shareholder and Sole Director of EB Fabrics Ltd (EB) in relations to commercial dealings for the supply of fabric to on the company’s customers. The paper analyzes the various legal options Eva may have in relations to the fabrics her company supplied to the Creative cotton. Discussion The legal Position of Eva as regard Invoice 2023 In respect of invoice 2023, EB fabrics had supplied CC with 300 metres of Black Cashmere wool blend at the price of $100 per Metre. Therefore, invoice 2023 dated 12 September 2012 totaled a $30,000. Under the terms and conditions of sale payment for the invoice was due to be paid 28 days after the delivery of the fabrics. CC paid for the invoice of 12 November, 2 days later than period set out in the terms and conditions of the sale. In English law, the Late Payment of Commercial Debts (Interest) Act 1998 was legislated to discourage the late payment of invoices1. According to the Act in Part 2 (2) the following contracts are covered by this legislation: a) contracts for sale of goods, b) contracts where title of ownership changes hands by means of a consideration including money2. Therefore, the contract for the supply of fabrics to EB is covered under the Act and CC may be able to seek remedies for the late payment by EB. The Late Payment of Commercial Debts (Interest) Act 1998 offers remedies for late payment in terms of interest charges and a fixed sum. Under Section 5(1) of the Act , a supplier is entitled to a fixed sum and in addition to the statutory interest on the debt3. The formula for determining the fixed sum to be charged is as follows: a sum of $40 for debts of lesser than $1000, a sum of $70 for debts between $1000 and $10,000, while debts of $10,000 and above attract a sum above $1004. The above compensation only arises where the debt satisfies the conditions of a “qualifying debt” under Subsection 3 of the Late Payment of Commercial Debts (Interest) Act 1998. Section 3 classifies all debts formed as a result of contractual obligation as qualifying debts. Therefore, the debt owed to EB by CC qualifies as it arises from the contract for the supply of the fabrics to CC. CC may dispute that EB claimed payment for the late invoice too late. However, under the statutory provisions in Section 2 of the Late Payment of Commercial Debts (Interest) Act 1998, interest for late payment of a debt starts accumulating on the day after the relevant day for the clearance of the debt5. Therefore, EB is entitled to claim an interest of above 8 per cent on the Bank of England lending rate for the period CC defaulted in clearing the debt. The legal Position of Eva as regard Invoice 2799 Under invoice 2799, EB supplied CC with 250 metres of cashmere wool blend at the price of $100 per metre. Thus, this invoice totalled $25,000 for all the fabrics supplied by EB. Terms of the contract were as follows: Payment was due after 30 days. Title and equity of the goods would pass on to CC once they had completed payment. EB could enter the premises of CC to recover the goods if CC defaulted in payment in full or partly. CC was required to pay for the goods supplied upon commencement of proceedings where buyer solvency is involved. Any products where EB fabric would be incorporated would become the property of EB as title had not been transferred. The relationship between EB and CC would remain Fiduciary until CC had completed paying for the fabrics supplied in full. EB has the right to trace proceeds of sales involving products where the fabrics supplied by CC are used. Presently, Eva the director of EB has learned that EB are undergoing liquidation proceedings. She is also aware that 300 metres of Wool Cashmere supplied to CC was lying in their Store. While 250 metres of Wool Cashmere has been converted to garment which have already been sold. In the contract for the supply of the fabrics, Eva had obtained an oral guarantee from Majid Khan the Director of CC that he would pay the Invoice if the company failed to pay. Advice The legal issue to be addressed in this case is whether EB and Eva can get or recover the goods sold to CC. Secondly, there is a second legal issue of whether the EB can recover the invoice amount from Majid Khan as a consequence of the oral guarantee he made to clear the invoice to Eva. The first issue of whether EB can recover the good supplied to CC as the company is undergoing solvency proceedings. Recovery of goods supplied in sale of goods contract is concerned with retention of title and clauses in the contract that address the issue. These issues are covered by Section 19 of the Sale of Goods act6. Courts also deal with the issue with reference to the Aluminium Industrie Vaasen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676; [1976] 2 All ER 5527. Section 19 of the Sale of Goods Act 1979 asserts that the sale of goods retains title of the goods until the contract terms he has set for the transfer of title are met. Subsection 1 states that; “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 the case of the contract between EB and CC for the supply of fabrics, the condition for transfer of the title is full payment of the amount due in the invoice. Since EB has not cleared the invoice the title for the goods remains with EB. Even in situation where a buyer has gone bankrupt a seller is able to recover goods they had supplied the business in solvency trouble. Retention clauses were designed to cover situations where the company was undergoing liquidation process8. However, in situations of insolvency, Section 11 of the Insolvency Act 1986 may prevent EB from recovering if they interfere with the administration regime9. In this case EB needs to obtain an order from a court of law to seize the goods owed by CC10. However , in relation to whether a company retains title to goods supplied, whether the goods retain their identity. In CKE Engineering Ltd (in administration) v Coseley Galvanising Ltd [2007] LTL 3/10/2007 addresses the question of whether goods still belong to the seller,11. According to Justice Bryson the wheat in flour fails to exist once it is baked into bread12. Similarly, the cashmere wool blend of 250 metres had already been incorporated into garment and sold. In this context, both EB and CC can claim co-ownership and the proceeds from the sale of the garments. The legal Position of Eva as regard Invoice 3234 Under invoice 3234 dated 31 October 2012 EB supplied CC with 300 metres of Wool/angora blend as &45 per metre. The invoice remained unpaid. In respect of this invoice, Eva obtained a promise from Majid Khan guaranteeing the payment obligation of the goods supplied. The terms and conditions for this invoice were similar to those of Invoice 2799. At the same time, CC became insolvent the whole wool/angora blend had been used for making garments. CC had already sold half the wool/angora blend garments. Issues The legal issue of whether EB retains title over the Angora/wool blend sold to CC even when the materials have been already converted to garments. The issue of whether the guarantee made by Majid Khan on behalf of CC can be used by EB to recover the goods. Advice Under section 19 of the Sales of Goods Act 1979, EB retains title over the goods supplied to CC until CC fulfils the conditions of the contract13. However, the Wool/Angora blend supplied by EB had already been incorporated into garments and half of those garments had already been sold. This brings about two issues concerning title clauses, whether EB can be able to recover the goods that have already been made up to garments. Secondly, whether EB can also recover proceeds for the sale of the garments made with the Wool/Angora blend they had supplied. Under the rule in Borden (UK) Ltd v Scottish Timber Products Ltd 14where the new product assumes a new identity the seller losses retention of title, this however it is not the case since the garments made are completely made of the Wool/Angora blend. In contrast, the ruling in Mercer v Craven Grain storage, title for grains supplied was retained by the supply as proportion of the total tonnage of grains it was mixed with15. However, in Clough Mill v Martin, the seller could not retain title over yarn supplied as the retention clause was declared void for non-registration16. Since, Eva has never approached a legal profession in drafting his clauses she may not be able to retain her title over the Guarantee of Payment versus Indemnity The two promises obtained by Eva for payment of the invoices 3234 and 2799 defer in that the oral promise made by MK to Eva constitutes a guarantee. While, the promise that is supported by an email is an indemnity. The two promises differ in that the promise for payment of invoice 2799 was on the condition that CC failed to pay17. In contrast, MK would assume liability for the credit offered to CC under invoice 3234 regardless of whether a demand for repayment had been made to CC. Similarly, In Yeoman Credit Ltd v Latter [1961] 1 WLR 828 at 830-831 guarantee was characterized as secondary liability while an indemnity was characterized as primary liability in reference to the fact that the liability of an indemnifier does not depend on the failure of the borrower to pay18. Is the advice equitable? Under the invoice 2023, EB cotton expectations are that they get compensated for the number of days CC were late in clearing the invoice. The advice therefore is equitable as under the Late Payment of Commercial Debts (Interest) Act 1998 EB can recover a fixed amount and interests for the number of days CC were late in clearing the Debt. As regard Invoice 2799, EB cotton expectations is that they can recover the 250 metres of Cashmere Wool blend supplied to CC as the retention of title clause stated that EB retain title over the fabrics until CC had cleared the invoice. The advice states that under the rules set out In CKE Engineering Ltd (in administration) v Coseley Galvanising Ltd [2007] LTL 3/10/2007 and Associated Alloys Pty Ltd v Metropolitan Engineering and Fabrications Pty Ltd that EB can recover the proceeds of sale of the garment sold by EB as they retained joint tenancy over the fabrics19. The final advice for Invoice 3234 is not equitable as it does not address the interests of EB as they are not able to recover the goods supplied as they retention clause had not been registered. In all the three invoices the expectations of MK and CC are met therefore making the advice equitable. CC expects that it can obtain the materials from EB and convert them to fabrics for sale a purpose that CC had already ensured them. Conclusion Companies must be careful while dealing with creditors who might become insolvent in the course of the transaction. Retention clauses may not be enforceable especially if they have not been registered like in the case of the retention clauses made by EB. Companies should seek the input of legal experts before drafting retention of title clauses to enhance their enforceability once a creditor goes through solvency proceedings. Bibliography Case law Aluminium Industrie Vaasen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676; [1976] 2 All ER 552. Associated Alloys Pty Ltd v Metropolitan Engineering and Fabrications Pty Ltd (2002) 202 CLR 588 CKE Engineering Ltd (in administration) v Coseley Galvanising Ltd [2007] LTL 3/10/2007 Clough Mill v Martin [1984] 3 All ER 982 Mercer v Craven Grain [1994] CLC 328 Yeoman Credit Ltd v Latter [1961] 1 WLR 828 at 830-831 Yeoman Credit Ltd v Latter [1961] 1 WLR 828 at 830-831 CKE Engineering Ltd (in administration) v Coseley Galvanising Ltd [2007] LTL 3/10/2007 Mill v Martin Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch. 25 Legislation Insolvency Act 1986 Late Payment of Commercial Debts (Interest) Act 1998 Sales of goods act 1979 Books D, Epstein SH, Nickles, Principles of Bankruptcy Law (Concise Hornbook) (Thomson West, 2007) W, Ringe, L, Gullifer & Thacry, P, Current Issues in European Financial and Insolvency Law: Perspectives from France and the UK: Studies of the Oxford Institute of European and Comparative Law (Hart Publishing, 2009) Read More