VISITING AN OLD FRIEND — THE “ROMALPA” CLAUSE

Published date01 December 1997
Date01 December 1997
INTRODUCTION

“A man’s creditworthiness is as good as his name.” So goes the old adage. While many businesses are still willing to grant credit based on the reputation of and previous dealings with their trading partners, the development of modern trade practices makes it less attractive to do so. The introduction of the concept of limited liability and the legal rules which give preference to creditors with security over corporate assets have made parties selling goods wary of extending credit too freely. In the competitive market of today, however, refusal to trade on credit terms may adversely affect a business. Innovative contractual devices have thus been thought up to deal with the concerns of sellers. One of these which is now frequently employed by goods suppliers is the “Romalpa clause”.

It has been twenty years or so since such clauses were first considered by the courts in the case of Aluminium Industrie Vaasen B.V. v Romalpa Aluminium Ltd1 (“Romalpa”). There have been some interesting developments relating to the extent to which such clauses may be used as a security device giving rise to much judicial and academic comment on the matter. This paper pays a visit to this old friend to see how it is getting on. We shall first look back at its birth and then briefly reacquaint ourselves with its development through the years. We will also examine the chief legal and practical issues associated with the use of such clauses and suggest how these problems may be addressed. The debate surrounding “current account” Romalpa clauses will also be highlighted in the discussion. Finally, we shall look at the future of Romalpa clauses in the light of proposals for reform of the law concerning its use as a security device.

GETTING REACQUAINTED

As was alluded to earlier, the Romalpa clause obtained its name after the English case of Aluminium Industrie Vaasen B.V. v Romalpa Aluminium Ltd2. The clause is also often referred to as a “reservation of title” or “retention of title” clause. Its essence is to reserve the property in the goods to the seller until he has been paid in full, notwithstanding that the goods may have been delivered to the buyer. The purpose of such an arrangement is to confer upon the seller the right to reclaim possession of his goods should the buyer become insolvent before paying the seller for the goods.3 Such clauses are necessary because under the law relating to

the sale of goods, ownership or title in goods generally passes at the latest on delivery in the absence of any express agreement to the contrary.4 If the buyer owned the goods when he became insolvent, a creditor holding a floating charge over the relevant assets would generally have priority to the goods as against the unsecured seller. This would put the vendor who sells goods on credit at a severe disadvantage. Inserting a Romalpa clause into the contract of sale would prevent the buyer’s secured creditors from having any rights over the goods as, until the seller receives payment, the goods sold do not form part of the buyer’s pool of assets. To further enhance their position, sellers have attempted to have the clause extended to cover the reservation of title to any end products, (into which the relevant goods have been incorporated), to themselves until they have been paid for the goods. Some clauses go further and require that all indebtedness from the buyer to the seller be discharged before title in the goods passes to the buyer.5

Since Romalpa in 1976, reservation of title clauses have become more commonly incorporated into supply agreements. Goode, in commenting on the case, stated that “it is doubtful whether any other case decided this century has created a greater impact on the commercial law”.6 Currently, many different versions are in use, some of which are of considerable complexity. Indeed, the law relating to Romalpa clauses has developed with such intricacy that it has been described as “a maze if not a minefield”.7

An overview of the leading cases

The notion of reserving ownership of goods supplied as a form of security for payment for goods was, in itself, not a new concept to English law at the time Romalpa was decided.8 There had been recognition in cases prior to Romalpa that contracts could and did provide for retention of title until payment.9 The basis for retention of title clauses arises from the common law principle that, in contracts for the sale of specific or ascertained goods, property in the goods passes when the parties intend it to pass. This was subsequently incorporated into section 17 of the UK Sale of Goods Act 1979 which Singapore has adopted as the Sale of Goods Act (cap 393) pursuant to the Application of English Law Act (cap 7A). However,

litigation on the effect of such a clause was rare and it was not until the clause was taken a stage further in Romalpa where the sellers attempted to reserve the property in goods until all that was owing to them had been paid that it became the subject of much judicial and academic discussion10. The decision resulted in a greater appreciation of the potential scope for the use of such clauses and the impact that this would have in cases of insolvency.11

Romalpa

The case involved the sale of aluminium foil from a Dutch supplier (AIV) to an English company (Romalpa). Romalpa was placed under receivership and at that time AIV was owed £122,239. It was certified by the receiver that he held £35,152 representing the sale proceeds of aluminium foil supplied by AIV. AIV claimed that they were entitled to this sum in priority to the secured creditors as well as against all other unsecured creditors. In addition, they claimed to be entitled to a quantity of aluminium foil valued at £50,235 which was certified to have been supplied by them and held by Romalpa. AIV relied on a standard clause in their Dutch supply contract which, translated, provided inter alia that “the ownership of the material to be delivered by AIV will only be transferred to the purchaser when he has met all that is owing to AIV…”. In addition, the clause had several other salient features. It provided that if the purchaser made a new object with the foil or mixed the material with other objects or if the material became a constituent of another product, ownership in the items which contained the aluminium supplied would be the property of AIV until full payment was received. Until such time Romalpa was to have possession of these items as fiduciary owner. Romalpa was however free to sell these items subject to the proceeds of such sale being made available to AIV on request so long as the debt to AIV remained undischarged.

It was conceded by Romalpa that the foil in the possession of the receivers was held by them as bailees for AIV so long as they had not paid AIV for the foil pursuant to the contract. The court thus held that the title to those goods continued to remain with AIV until the debt had been discharged.

The main issue which needed to be resolved was that concerning the proceeds from the sale of the un-mixed foil. While the clause dealt with the proceeds of sale of mixed foil to sub-purchasers, it was silent in relation to proceeds from the sale of un-mixed foil. At first instance, Mocatta J gave judgement in favour of AIV on the grounds that on the facts, the intention was to create a fiduciary relationship between the parties thus

enabling AIV to recover the proceeds of sale of the un-mixed foil under the principle of Re Hallett’s Estate12 and the equitable remedy of tracing.13

The decision was upheld by the Court of Appeal. Roskill L.J agreed with the first instance judgement. He rejected the argument put forward by counsel for Romalpa that to find a fiduciary relationship between the parties would be against business efficacy. Counsel’s argument was that such a finding would require Romalpa to hold proceeds of sale of foil to sub-purchasers on trust for AIV and prevent Romalpa from using such proceeds for any purpose save for paying AIV. This would cause severe cash flow problems for Romalpa. The learned judge disagreed and formed the view that the obvious purpose of the clause was to place on the buyer the obligation to account for the proceeds in accordance with the normal fiduciary relationship of principal and agent, bailor and bailee.14

The decision in Romalpa is significant in that it permitted a seller of goods, by contractually retaining title to the goods sold, to create an interest in the goods such that he is entitled not only to the goods themselves, but also to the proceeds arising from the sale of those goods. At first instance, it was argued that this in effect amounted to the creating of a charge over the goods which was registrable under s 95 of the Companies Act 1948.15 This argument was rejected on the grounds that only charges over the property of the company were registrable under the provisions and since property in the goods remained with the seller, no registrable charge was created.16 It is submitted that Mocatta J in so finding failed to distinguish between the goods in question and the sale proceeds of the said goods. It was obvious that if the proceeds had actually exceeded the sums due to AIV that nobody intended for them to keep the excess. Since AIV were only entitled to the proceeds of sale insofar as they were necessary to pay off what was owed to them, the Court of Appeal’s conclusion that all the money received was to be held on trust for AIV should have involved a recognition that the arrangement in fact amounted to a registrable charge.17

Such, however, was not the outcome, possibly because the point was not re-asserted in the Court of Appeal. This unsatisfactory position of Romalpa resulted in several subsequent cases seeking to limit the case to its special facts.18

Subsequent Cases

In Re Bond Worth Ltd19, suppliers sold synthetic Acrilan fibre to Bond Worth to be used in the latter’s carpet...

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