Retaining title may mean losing payment!

Retention of Title and Payment

Many businesses will have a retention of title clause included within their standard terms and conditions. Such a clause commonly acts to prevent title to goods passing to the buyer until the goods have been paid for, and is designed to give the seller some protection in the event of the buyer’s insolvency. Simon Thomas, Partner, and Gavin Evans, Associate in the Commercial Dispute Resolution team, look at a recent Court of Appeal decision that has thrown light on an unfortunate potential side effect – namely that the clause might prevent the seller from suing the buyer for the purchase price if the buyer fails to pay.

In the case of Caterpiller (NI) Ltd (formerly FG Wilson (Engineering) Ltd) –v- John Holt & Co (Liverpool) Ltd [2013] EWCA Civ 1232, the Court of Appeal emphasised that a seller’s entitlement to pursue the buyer for the price of goods sold is found in section 49 of the Sale of Goods Act 1979. Section 49 (1) provides that:

“Where, under a contract of sale, the property in the goods has passed to the buyer and he wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the seller may maintain an action against him for the price of the goods.”

The problem for a seller with a retention of title clause is that the clause is intended to operate to prevent property (title) in the goods passing to the buyer and so, where a retention of title clause is valid and incorporated into the contract of sale, s.49 (1) does not apply as property in the goods will not have passed to the buyer in the absence of payment.

That means that the seller must look to section 49 (2) which states that:

“Where, under a contract of sale, the price is payable on a day certain irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may maintain an action for the price, although the property in the goods has not passed and the goods have not been appropriated to the contract.”

Whether a seller with a retention of title clause can fit within the provisions of s.49 (2) depends on their payment clause. That clause must ensure that the price is payable on a date which is not related to when the goods were delivered. So, for example, a clause which provided that payment was due on “the last day of the month following the month of delivery”, would not satisfy s.49 (2) since the required date of payment is not certain “irrespective of delivery”.

Gavin Evans comments: – “This decision essentially re-states the existing law, which has been largely overlooked. It highlights an unintended and potentially costly consequence of opting for the apparent protection of a retention of title clause. If a seller wants to retain title in order to have the ability to recover his goods, he will not be able to claim the price of those goods unless his payment term is drafted so as to fit within s.49 (2).”

Simon Thomas adds: – “Businesses should check their terms and conditions as a matter of urgency to ensure that they fit together in such a way as to give maximum protection if a buyer fails to pay for goods supplied.”

The Commercial Dispute Resolution team at The Wilkes Partnership advises on all forms of contractual dispute and frequently acts for businesses pursuing payment for goods supplied. For more information or to discuss any of these issues please contact either Simon Thomas (0121 710 5914) or Gavin Evans (0121 710 5950).