Are your goods safe?

Retention of title (ROT) clauses or "Romalpa"1 clauses have become commonplace in contracts for the supply of goods.

ROT clauses provide that the property in goods sold does not pass until the buyer has paid the price for those goods. For example, a successful ROT clause will mean that the buyer of goods does not necessarily own the products until it has paid for them, even if he holds possession of the product.

The purpose of such clauses is to protect the unpaid seller from the insolvency of the buyer and defeat the claims of other creditors who hold registered charges over the buyer's assets.

A simple ROT clause retains ownership of goods in the seller until payment is made for those particular goods. By careful wording, the protection afford by a ROT clause can be extended to address the following circumstances:

  • To operate as an "all monies" clause, by which title will not pass to any goods supplied by the seller to the buyer until all goods (over various transactions between the parties) have been paid for in full by the buyer;
  • Where the buyer resells goods to a sub purchaser, a ROT clause may require that proceeds of such resale actually received from the sub purchaser by the buyer are held by the buyer on trust for the seller; and
  • Where the buyer uses goods subject to a ROT clause in producing a further product, the buyer may be required to hold a portion of the proceeds received 5 Industrie Basten B.B. v Romalpa Limited is the case with which the term Romalpa clause originated. from the sale of the further product (equal to the amount owing for the goods sold by the original seller) on trust for the seller.

A simple ROT clause is ineffective to retain title in instances when identification of goods held by a buyer is not possible. For example, where a farmer delivers wheat to a silo, and it therefore becomes impossible to separate the seller's wheat from other wheat already in the silo, a ROT clause would be ineffective to retain title for the seller.

The High Court decision of Associated Alloys Pty Ltd v Metropolitan Engineering & Fabrication Pty Ltd 2, however, established that an appropriately worded ROT clause, even if a seller's goods cannot be identified, could be effective to establish a trust for proceeds of a further sale, if these proceeds could be identified. Although the clause in Associated Alloys was effective, ultimately the seller could not establish a claim as the proceeds could not be identified.

By analogy to the decision in Associated Alloys, it is also possible that an appropriately worded ROT clause may extend to apply to goods which have been used and incorporated in another product.

There continues to be some confusion surrounding the effectiveness of ROT clauses in cases where goods are not identifiable.

This confusion has been settled to some extent by the recent legislative introduction of Section 20A of the Sale of Goods Act 1895. The amendment brings South Australia into line with other states across Australia.

Sellers who deposit goods in a bulk store are considered owners in common of the bulk, subject to an agreement to the contrary. Again, using the grain example, sellers will now be considered proportionate owners of the bulk goods stored in the silo, notwithstanding that each 6 [2000] HCA 25. seller cannot identify their individual goods within the silo.

The Act only affects "bulk goods" and does not apply to all goods. Part payment for goods is taken to be payment for a corresponding part of the goods, but Section 20A does not specify that the buyer must pay "in full" for the goods that form part of the bulk.

It is clear that the legislative amendments are trying to find a common ground between buyers and sellers. In the current economic climate, it is important for suppliers to ensure that their ROT clause offers the maximum protection available. We can assist by reviewing your terms of trade and updating them as necessary.

Footnotes

1 Industrie Basten B.B. v Romalpa Limited is the case with which the term Romalpa clause originated.

2 [2000] HCA 25.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.