It is common to see clauses in commercial contracts involving the sale of goods that reserve title in the goods to the seller pending payment of the price, or indeed pending payment of all sums due between the parties. It is even possible for properly drafted clauses to reserve title pending payment of all sums due to any company in the seller’s group. This gives the seller a powerful position in the event of the insolvency of the buyer.
The basic principles have been long settled in both Scots and English law but a recent appeal case in England, Sandhu v Jet Star Retail Ltd [2011] EWCA Civ 459 shows that, in the law, there is always scope for new issues and nuances to be tested. This comes as no surprise, given the nature of lawyers and the legal process itself – lawyers draft contracts in close detail (often responding to new case law) and when disputes arise those details are then given close scrutiny. This case is perhaps an example of a clause that tried too hard.
The case concerned a contract for the supply of fashion clothing by a manufacturer to a retailer. The retention of title clause stated that if the retailer became insolvent, the manufacturer could require the retailer to not dispose of the goods until they had been paid for in full. The retailer went into administration and continued trading for a short time, selling stock which it had not paid for. The business was then sold on terms that included stock supplied by the manufacturer that had not been paid for.
The manufacturer’s lawyers argued, unsuccessfully, that the retailer’s authority to dispose of the goods extended only to the ordinary course of its business, which had ceased upon the retailer’s entry into administration. The court rejected this argument and held that the drafting of this clause meant that the retailer had implied authority to sell goods supplied by the manufacturer unless and until the manufacturer exercised its right to withdraw that authority, which it had not been.
The existence of what seems to be an additional right for the benefit of the manufacturer, ironically, was the undoing of the manufacturer’s case. Had the right to prohibit the sale of goods not been built into the contract, the manufacturer would have been in a stronger legal position and thus better off in commercial terms. The manufacturer was left only with a claim for payment for the goods rather than any better right which, after all, had been the point of the retention of title clause in the first place.
Some commentators on this English case have described the court’s interpretation as “commercial”. The same result would seem to follow in Scotland even on the basis of the traditional (and typically Scottish) approach that contracts mean what they say, not what one or other party intended them to say – to paraphrase a Scottish judge in a case reported in 1907 concerning the sale of a piano.
Contact: Ralph Riddiough