There has been a recent Court of Appeal decision in England that will affect suppliers of goods who rely on retention of title ("RoT") clauses where those terms are governed by English law.
Background
RoT clauses are used in many sectors to provide security to the supplier of goods on the insolvency of its customer. They can be used in simple supplier to wholesaler or retailer contracts, as well as complex commodities agreements. RoT clauses provide that title in goods only passes from the supplier to its customer on certain conditions, usually upon payment to the supplier of all sums owed. This means that, on an insolvency, the supplier can take back the stock or require payment for its continued sale, rather than being left as an unsecured creditor.
Administrators or Liquidators of companies may challenge the efficacy of RoT clauses on the following grounds: firstly, they might dispute whether the term has been incorporated into the contract between the parties. For instance, if the relationship has developed by a course of dealing, it may be more difficult for the supplier to prove that the RoT clause forms part of a contract than if there is a signed agreement. Secondly, the supplier may be required to identify the goods to which it claims ownership.
The Decision
However, a further hurdle has been put in place by the decision in Bulbinder Singh Sandhu (trading as Isher Fashions UK) -v- Jet Star Retail Limited (in Administration) & Others [2011] EWCA Civ. 459. That case repeated that the Courts will be willing to imply into supplier contracts an ability for the retailer to sell the goods in the "ordinary course of business", free of the retention of title. Unless otherwise stated in the contract, or notice has been given terminating the same, the ability to sell continues when the supplier has entered into insolvency. However, the Court of Appeal decision went one step further, and determined that a bulk sale by the Administrator of the goods was within the "ordinary course of business" of that retailer (a fashion brand).
This means that when an Administrator or Liquidator is appointed over a company, he/she may be able to immediately sell all of the goods free of the RoT clause, and the supplier would be left as an unsecured creditor. If the retailer is heavily insolvent, this could have the effect that the supplier receives no financial compensation at all.
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.
