The High Court lays down some new law

Reservation of title or Romalpa clauses

This particular case note is one on a difficult area of technical law - but one of great importance to all companies which sell goods on the basis that the goods will either be held on behalf of the vendor, or returned to the vendor if unsold, or if used in making up other goods. In such a case the vendor will try to protect its rights over the goods pending payment through the inclusion of what is known as a reservation of title clause - a Romalpa clause. This is an important safeguard for companies which sell goods which are to be used in the manufacture of other goods but which have not been fully paid for at the time. So, for example, if company A sells company B a product that is to be incorporated in a bigger product, the first product has not been paid for, the vendor company will want to reserve title in those products until full payment has been made. If the buyer company goes into liquidation and the products are claimed by a liquidator, the vendor company will want to reclaim those products because it has not been paid for them. The vendor company usually tries to achieve this through a reservation of title clause. The operation of such a clause was recently considered by the High Court in the case of Associated Alloys Pty Ltd v ACN ... Pty Ltd (in liquidation) (Formerly Metropolitan Engineering and Fabrication Pty Ltd) & Anor ((2000) 18 ACLC 509).

We take the facts from the CCH Law Report. Associated Alloys Pty Ltd (Alloys) sold steel to Metropolitan Engineering and Fabrications Pty Ltd (Metropolitan). In its invoices, Alloys included a retention of title clause which included the following sub-clause: "(5) In the event that the [buyer] uses the goods/product in some manufacturing or construction process of its own or some third party, then the [buyer] shall hold such part of the proceeds of such manufacturing or construction process as relates to the goods/product in trust for the [seller}. Such part shall be deemed to equal in dollar terms the amount owing by the [buyer] to the [seller] at the time of the receipt of such proceeds." Three invoices were sent by Alloys in 1995 in connection with the supply of steel to Metropolitan - two of them contained sub-clause (5) above. In January 1996, there was a balance of $US197,911 outstanding on this steel. In February 1996, administrators were appointed to Metropolitan which subsequently went into liquidation. The administrator then became the liquidator.

The steel described in these three invoices was used by Metropolitan for the fabrication of pressure vessels and other goods for a Korean company. Most of the steel products had been shipped to the Korean company at the time these proceedings commenced, although one pressure vessel remained in Metropolitan's possession. The purported continuing interest of Alloys in the title to the steel supplied to Metropolitan was not registered under section 262 of the Corporations Law. This provision allows a company to in effect protect its interests in any property under a charging system that operates in the legislation. Failure to register a charge may result in the charge being defeated - that is the rights of the party who has security in the relevant goods but fails to register that title losing out. In April 1996, Alloys commenced Supreme Court proceedings in New South Wales arguing that its right under the retention of title clause should be recognised. The primary judge dismissed the claim as did the New South Wales Court of Appeal. They did so on the basis that the charges were registrable under the Law and that Alloys had failed to register them. Therefore its claim to the goods failed.

The High Court of Australia on appeal held that the claim should be dismissed. In the view of the majority of the High Court the decision of the Court of Appeal was correct but for different reasons. The High Court ruled that the agreement to deal with future acquired property was not a charge under the Law and was not registrable under the Law. Alloys had no obligation to lodge a registration notice under the relevant section. Accordingly in that context Alloys was successful - its interest was not void as against the liquidator. However, Alloys failed because it had been unable to identify whether any payments made by a third party company to Metropolitan had been made for the steel that had been supplied by Alloys under the particular invoice. Alloys had not demonstrated the receipt of future acquired property by Metropolitan. In the circumstances it could not rely on the terms of the clause and it could not trace the property to the payment. The attempted Romalpa clause in this case failed. Kirby J who also agreed with the result did so for different reasons. He held that the relevant interest created by the agreement was a charge registrable under the Law and that the failure to register was fatal.

In both cases Alloys failed. The result of the case, on the basis of the majority decision, is one that suggests that great care will have to be taken in dealing with such clauses in the future to ensure that the particular property that is the subject of such attempted "protection" is easily identifiable and dealt with in a way that can clearly be traced at a later time. Romalpa clauses will prove to be inadequate in these circumstances unless sufficient care is taken that they are structured in a way to capture the appropriate arrangements between the parties.

Disclaimer
The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.