untitled

Reservation of title (ownership) by the seller 211

Reservation of title (ownership) by the seller

Section 19 gives the seller the right to retain ownership of goods sold until some condition
(almost always that the buyer has paid the full price) is fulfilled. A clause in a contract
which says that the ownership of the goods is not to pass until some condition has been
fulfilled is called a reservation of title clause, or a reservation of ownership clause.

Example

Shaun sells his second-hand car to B Ltd, which takes delivery of the car. A term of the

contract states that ownership of the car is not to pass to B Ltd until the full price is paid.

Normally, ownership would have passed at the time of the contract because the goods were

specific goods in a deliverable state (s. 18 Rule 1). However, ownership will not pass to B Ltd

until the full price is paid. So if B Ltd becomes insolvent, Shaun will be able to reclaim

possession of the car from B Ltd’s liquidator because Shaun is still the owner of the car.

Shaun would then have to refund to B Ltd’s liquidator any part of the price which B Ltd had

already paid. If there had been no reservation of title clause, B Ltd’s liquidator would have

been entitled to keep the car (it would have been B Ltd’s property at the time of B Ltd’s

insolvency) and Shaun could have claimed for the price only as an unsecured creditor.

Unsecured creditors are not paid all that they are owed when a company goes into insolvent

liquidation and may well be paid nothing (see Chapter 11 at pp. 322 – 3). So it is far better for

a seller to reclaim the goods sold.

There is no doubt that a simple reservation of title (ROT) clause will be effective.

More complex clauses are less likely to work. Many will be void as unregistered charges.
When a company gives a property interest as security for a debt, that is called a charge (see
Chapter 11 at pp. 319–21). Section 860 of the Companies Act 2006 makes charges void if they
are not registered with the Registrar of Companies. It is impractical to register ROT clauses
as charges.
In Re Bond Worth Ltd (1980)Slade J said that a charge would be created:

(i) whenever a company created an interest in property in order to secure a debt; and

(ii) the property interest would cease to exist if the debt was paid.

This means that the more complex types of ROT clauses might be void as unregistered
charges.

Clough Mill Ltd vGeoffrey Martin (1985) (Court of Appeal)

Large quantities of yarn were sold to a manufacturing company. A reservation of title clause

said that ownership in the yarn was not to pass until it had been paid for in full. Before the

yarn had been paid for, the manufacturing company went into liquidation.

HeldThe seller of the yarn could recover yarn still in the manufacturing company’s pos-

session. The ROT clause was effective and so ownership of this yarn never passed to the

manufacturing company.