Hardy Wine Company Limited v Tasman Liquor Traders Pty Ltd (in Liquidation) [2005] SASC 398 demonstrates a sellers failed attempt to enforce a retention of tile (ROT) clause, with a dramatic consequence - worth $282,000. This ROT clause failed to meet the particular needs of the trading relationship. An alarm bell should ring for sellers who use a “one clause fits all” approach for all their clients.
The Hardy ROT clause fatally failed to deal with its customer’s known resales of Hardy’s wine. Hardy delivered wines at the request of its buyer, Tasman, directly to Eaglehawk (a pub). Hardy then invoiced Tasman and Tasman invoiced Eaglehawk. Tasman went into liquidation. Hardy failed in its claim to title in unpaid for goods left at Eaglehawk. Basically, the court held that the wording in the ROT did not specifically cause it to apply to such a resale and delivery. Eaglehawk had no contract with Hardy, nor did Tasman ever possess the goods as a bailee so as to enliven the clause.
For more information contact James Hamilton on 9108 6403 or
Email: jhamilton@rbhm.com.au
Comments
So long as the ROT clause can be proved to be part of the terms of trade, it is relatively easy to retain title in unpaid goods which remain in store and identifiable at an insolvent buyer’s premises. The claim will be stronger if the ROT clause prevents title passing until “all monies owing on any account” have been paid. If the balance owed by the buyer to the settler never reaches zero, then usually all ROT stock remaining in the buyer’s hands can be claimed by the seller.
ROT problems fall into many categories, however the wording in the Sale of Goods Act from which ROT clauses derive their validity, creates some of the enforceability problems. That Act requires a court to determine the intention of the parties by considering not only the ROT words, but also the conduct of the parties and the circumstances of the case – a substance over form approach. In the leading ROT case of Associated Alloys, the High Court approved of a complex ROT clause and seemed to give great weight to the clear words in the ROT clause. The lower courts still seem to be concerned with the validity of any part of an ROT clause which is out of touch with the commercial reality of the actual trading relationship between the parties. Usually the problem is created by the nature of the agency of the buyer and whether it can on-sell the goods it apparently does not own, until they are paid for.
In the Associated Alloys case, a seller tried to trace its claim through to part of the proceeds of the buyer’s sales using product of the seller. The seller failed entirely because it could not prove what proceeds remained traceable at the time of the insolvency of the buyer. This case is itself a classic example of a well worded ROT clause failing in its practical application.
Most of the difficulties of enforcing the more complex ROT clauses have come about when sellers attempt to create a trust or fiduciary relationship, when the sale process between the parties fails to match the indicia of such a relationship. This trust mechanism, with its proprietory tracing remedy or equitable charge over cash created from the sale of the goods, as opposed to an unsecured claim, is used to overcome the risk of an ROT clause otherwise being held to be a charge over certain assets of the buyer, which would require registration with ASIC. A charge which arises via a trust or fiduciary relationship ( by operation of law) is exempt from such registration.
The complex clauses often seek to create a right for the seller to recover:
- goods which have been on-sold by the buyer to sub-buyers; and/or
- all or part of the sales proceeds received by the buyer, from its sales of the ROT product to sub-buyers.
In BHP v Robertson, a NSW case, Barrett J. noted that, where a wholesaler is selling to a retailer certain steel products, it would be a common expectation that the retailer would turn the steel into steel products or sell them again, to generate the cash to pay the outstanding price. It would be commercial unreality to think that the retailer would otherwise generate cash to pay for the goods, which both know are to be passed on to others. An implied authorisation for the buyer to sub-sell can operate if sub sales are not prohibited. That can mean title in fact will pass to the sub-buyer, which is what was held in that case.
Often, the customer alone decides who it may sell the goods to, at what time and at what price. This suggests that in respect of sub-sales, the owner could not have intended to retain title to the goods being on-sold. That tends to operate against a contention that the sub-buyer retains no title to the goods. Substance may rule over form.
In summary:
- a seller should never expect its standard ROT to work in all situations
- match the ROT clause to the method of trading
- sub-sale proceeds and sub-sale stock are difficult to claim
- consider the use of a registered fixed and floating charge, if significant debt is to be incurred in respect of significant quantities of goods
- use director’s personal guarantees (whilst obviously variable in their value) where feasible.
For further information please contact James Hamilton on (02) 9018 6403 or jhamilton@rbhm.com.au
|
Back