Last month we started an article on retention of title clauses and looked at the rights, obligations and protection of voluntary administrators. This month we look at how far these clauses can be used by suppliers to recover goods and money.
There are 3 common types of retention of title clauses, all having slightly different effects on the rights of the supplier to retake possession of goods and, in some cases, collect money that arose from the sale of the goods that they supplied. These are commonly known as:
1. Title of Goods clauses
2. All Monies clauses
3. Tracing clauses with Fiduciary or Trust Relationships
Title of Goods clauses
These are the most basic clause and state that title or ownership does not pass until payment has been made in full. Coupled with a provision to allow access for collection, they allow suppliers to collect goods that were supplied under invoices that remain unpaid, but not goods that were supplied under invoices that have been paid, or collect monies that have been generated from the on-sale of the goods.
All Monies clauses
Properly worded, these have the same effect as the Title of Goods clause, but also they retain title in goods that has been supplied under invoices that have been paid by providing that title to any goods does not pass until all indebtedness has been paid. Suppliers will be able to collect any of their goods if there is any current debt.
If the customer pays all of the supplier’s outstanding debts down to zero (i.e. they do not owe the supplier any money), title to all goods held at that time will pass to them. Because title to the paid goods passes, suppliers will not be able to collect these goods in satisfaction of later unpaid invoices. They will have to identify the actual goods supplied under those later unpaid invoices.
Tracing clauses & Fiduciary or Trust Relationships
These have the same general powers of the first two clauses, but also include provisions that money from the sale of the goods supplied should be kept in a separate bank account and held on trust for the supplier. If the monies are not kept separately, a properly drafted clause will allow a supplier to trace the proceeds from the on-sale of their goods into the customer’s bank account.
In some cases, the wording of the clause will also cover money owed to the customer from the on-sale of goods. That is, title to the money owed by the debtor is held in trust.
There are some factors that suppliers must consider.
The first is that retention of title clauses are contractual arrangements and must be communicated to the customer as part of the sale. These clauses cannot generally be added at a later date. Most suppliers include these clauses to their Terms and Conditions as part of their Credit Applications signed before any credit is given. They also print them on the back of invoices, but invoices are generally issued after the sale has been negotiated, and by themselves may not be enforceable against goods supplied until these terms have become an agreed part of the supply contract over time.
The second factor relates to the provisions in Corporations Act and each state’s Bills of Sale and Other Instruments Acts that void unregistered charges. Some retention of title clauses may be classified as charges (and they will generally be unregistered) if they attempt to include goods or money over which the supplier has not retained title.
Another factor is whether the goods supplied still exist in their original – or close to it – form. Goods generally cannot be recovered if they have been mixed or joined to other items and cannot be separated – their identity has been lost or converted.
Some suppliers attempt to recover monies from the on sale of goods where their clauses are not the ‘All Monies’ type of clauses, or recover goods they did not supply or goods where title has passed. In one recent case handled by Worrells the supplier attempted to recover money from the sale of goods that they did not even supply.
Suppliers wishing to rely upon retention of title clauses will have to ensure that their clause extends as far as they believe necessary, but that their actions do not reach the exercise of a ‘charge’.