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You have a retention of title clause but will you be paid?

I am returning to the topic of retention of title clauses (which I last discussed in 2013) because in PST Energy 7 Shipping LLC v OW Bunker Malta Ltd, the Supreme Court considered a difficult point on the interplay of these clauses and a seller’s remedies when it has not been paid but there has been a sub-sale.

Retention of title clauses

To recap, retention of title clauses are commonly inserted in contracts for the supply of construction materials. Typically, a supplier will sell goods to a contractor subject to such a clause. The contractor will be permitted to resell them to the employer and they will usually become the employer’s property once “built in” to the works.

However, if the retention of title clause is effective as between the supplier and contractor and the contract price is unpaid, then the supplier may seek to proceed under the contract for the price applicable.

What can be difficult about that?

This question arose in 2014 in Wilson v Holt (usually known as Caterpillar), a claim related to the supply of generators. The supplier sold them and the buyer sold them on again. The contract was subject to a retention of title clause and the supplier sued for the price. It was met with the argument that this could only be done where section 49 of the Sale of Goods Act 1979 (SGA) applied.

(Section 49 permits an action to be brought for the price where there is a contract for sale of goods, the property in the goods has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods according to the terms of the contract. However, by definition, this section cannot benefit a supplier where property in the goods has not passed to the buyer as a retention of title clause applies.)

In Caterpillar, the Court of Appeal held that section 49 was an exhaustive code of the supplier’s rights to claim for the price, leaving only a claim for breach of contract and the uncertainties of general damages.

Although permission to appeal was given in Caterpillar, I understand the case settled before it reached the Supreme Court. However, the same issue arose in PST Energy, which the Supreme Court decided earlier this month.

PST Energy 7 Shipping LLC v OW Bunker Malta Ltd

While this was a shipping case concerned with the sale of bunkers (fuel oil), the principles are applicable to contracts for the supply of materials generally.

In PST Energy, the Supreme Court decided that the parties’ contract was not covered by the SGA, but (and it’s a big but), decided obiter that, if the SGA had applied, Caterpillar was wrongly decided. Therefore, the supplier could claim for the agreed price under the terms of the supply contract and was not bound by the restrictive provisions of section 49.

It is worth highlighting that the SGA only applies to contracts where goods are being sold and not where services are also provided under the same contract. Therefore, it would not apply to a contract for the supply of work and materials. As such, this decision will largely serve to provide comfort tothe suppliers of materials.

The Supreme Court also noted that the wording of the SGA was substantially the same as both the original 1893 Act and the earlier common law position. Its purpose was to provide a remedy to a supplier where the buyer had both taken delivery of the goods and property had passed to it. It would be unfair to seek payment (rather than damages) where delivery had not occurred and the goods had perished or been damaged, unless the goods had already become the buyer’s property.

The Supreme Court concluded that there may be other circumstances where section 49 will not preclude recovery of the price under a supply contract, but the scope of these circumstances remain to be determined. Further, the Court of Appeal in Caterpillar decided that the buyer had acted as the seller’s agent in parting with the goods on sub-sale. Again, this issue will have to be decided in another case in the Supreme Court.

Herbert Smith Freehills LLP Michael Mendelblat

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