What is a Retention of Title Clause?

A retention of title clause or “Romalpa” clause as they are often referred to after the case of Aluminum Industrial Vaassen v Romalpa Aluminum [1976] 2 ALL ER 552 can often be found in contracts for the supply of goods.

The purpose of a retention of title clause is to offer an opportunity for the seller of the goods to retain the title in them until the buyer has paid the price in full. The effect of the clause is to protect the seller in the event the buyer doesn’t pay or goes into insolvency by giving the seller priority over the buyer’s other creditors.

Under section 17 of the Sale of Goods Act 1979, title in goods will pass when the buyer and seller intend for it to pass. A seller is also permitted to include terms in the contract with the buyer reserving the right to the disposal of the goods under section 19 of the Sale of Goods Act 1979. The inclusion of a retention of title clause can show that the intention of the parties was that the title in the goods did not pass from the seller to the buyer until full payment for the goods was received.

What does Retention of Title do?

Under a simple retention of title clause, a seller retains the title in the goods until the buyer pays the price for the goods. The legal and beneficial title should be reserved for the seller and the seller, therefore, continues to own the goods until they have been paid for.

A valid retention of title clause gives the seller of the goods priority over secured and unsecured creditors of the buyer if the buyer fails to pay for the goods in the event of insolvency or because of any other reasons which are specified in the clause.

Limitations of a Retention of Title clause

1. Perishable Goods – a retention of title clause will not be helpful where the goods in question are likely to perish before payment is made e.g. flowers.

2. Mixed Goods – the mixing of goods occurs in a variety of situations. One example is if a business sells wood to a buyer and they create a piece of furniture with it. Unless the goods can be separately identified and removed without damaging the other goods they have been mixed with (not possible in this case), it will not be possible to retain the title.

If a number of sellers sold identical pieces of wood to a buyer which weren’t separately labelled or identified, this would render any retention of title clause unenforceable as although the goods were still in the same form as when they were delivered, it is not possible to distinguish whose wood belongs to whom. However, one potential way around this issue would be to include an obligation for the buyer to label the seller’s goods and to keep them separately at their premises at all times.

3. Ordinary Course of Business – if in the ordinary course of business the buyer sells goods on before paying for them and the seller is aware of this, this would likely make any retention of title clause unenforceable.

Key Elements of a Retention of Title clause

A well-drafted retention of title clause should deal with the following:

• Provide that the seller retains legal and beneficial title to the goods until full payment is received.
• Allow the seller to enter the premises of the buyer to recover the goods.
• Oblige the buyer to store the seller’s goods separately.
• Oblige the buyer to mark the seller’s goods as belonging to the seller.
• Specify the events which trigger the seller’s ability to enforce the retention of title clause.

Do I need a Retention of Title clause?

A retention of title clause can be invaluable to a business in the event a customer becomes insolvent or does not pay for goods which have been sold to them. Where you are supplying goods which are not paid for upfront, we would always recommend including a retention of title clause in your supply of goods agreement. However, they are a complicated area of law and are regularly challenged by insolvency practitioners so it’s important to get the proper advice to implement them correctly.

If you require a new supply of goods agreement or require your current agreement to be reviewed, then please contact BHW’s commercial team on 0116 289 7000 or email info@bhwsolicitors.com.