Simple retention of title clauses are commonplace and generally effective in contracts for the sale of goods. However, extending their effect to the proceeds of sale of such goods requires careful drafting.
The Court of Appeal has provided some further clarity around the creation and effects of fiduciary obligations in relation to such clauses.1
Proceeds of sale clauses
It is well established that there is a risk that any attempt to capture the proceeds of sale of goods supplied subject to a retention of title clause, may be construed as a charge and therefore void for want of registration.2
To avoid this conclusion and therefore be entitled to trace the proceeds, the seller must be able to establish a fiduciary relationship between the seller and the buyer. For a period of time there was some doubt as to whether this could be accomplished successfully. However, in Carroll Group Distributors, 3 the High Court stated as follows:
"It seems to me that the question must be asked how does a party come to sell property of which he is not the owner?
· Is he selling as a trustee in pursuance of a power of sale?
· Is he selling as the agent of the true owner?
· Does the sale constitute a wrongful conversion?
If any of those questions were answered in the affirmative it seems to me that the law would impose a trust on the proceeds of sale which would confer on the true owner the right to recover those proceeds from the actual seller or, if the proceeds were no longer in the seller's hands, to trace them into any other property acquired with them. If the new asset was acquired partly with such proceeds and partly with other monies provided by the seller then the right of the true owner would be to a charge on the new asset or mixed fund to the extent of the proceeds of the sale of his property. This is the rule enunciated in In re Hallett's Estate; Knatchbull v Hallett (1880) 13 Ch D 696." [Questions reformatted for clarity.]
Creating a fiduciary relationship
In ADM Londis Plc v Ranzett Ltd & Ors 4 the parties entered into a number of interlinked agreements in relation to the operation of a grocery shop. When the business failed to prosper, ADM Londis terminated the agreements, repossessed most of the stock, de-branded the shop and sued for debt and on foot of personal guarantees given by the second and third defendants. The defendants counterclaimed for, amongst other things, alleged breach of contract.
One clause in the...