The Gazette 1989

GAZETTE

JULY 1989

taining contractual terms will normally be bound by them even though he may have read them and even though he may be ignorant of their precise legal effect. Problems Arise With regard to Reservation of Title however, there is more to consider than the supply contract, the reason being that there are usually parties other than the supplier and purchaser involved and conse- quently there are more rights which deserve the-protection of law. If the only parties affected by a reservation of title clause were the supplier and purchaser, the Courts would no doubt respect and protect the parties' freedom to contract. But this is very rarely the case. There are usually third parties, existing and prospective creditors for example, who have an interest in knowing exactly what it is the purchaser owns, how much the purchaser is worth and by corollary what it is that the purchaser doesn't own. Because these third parties tend to rely on this information in their dealings with the purchaser, they too have rights which deserve the protection of law. For example, A has supplied plant and machinery on credit to B with a reservation of t i t le clause included in the supply contract. C is considering whether or not to give or to extend credit to B. When C notices B's apparent ownership and apparent ability to pay for a spanking new plant and machinery, C will almost certainly be more disposed towards giving credit to B in the mistaken belief that B owns the plant and machinery. C should therefore be put on notice of what B in fact owns. The general purpose of Section 99 of the Companies Act, 1963 is to make third parties such as actual and prospective creditors aware of the existence of charges over a debtor company's assets. This it does by requiring certain types of charges to be registered. But does a reservation of title clause create a charge over the property reserved and if so at what stage and in which kinds of case is the supplier's proprietary interest converted into a compulsorily registerable charge? On the one hand there is the argument that the supplier's rights

the relationship between itself and the suppliers ceased to be that of bailor-bailee. Instead it claimed that the new relationship was one of creditor-debtor, the point being that if this were the case, the fiduciary relationship between the parties would be negatived and there could be no tracing remedy. The Court of Appeal held that until the foil was paid for it remained the property of the supplier. Thus the Defendant Company was entitled to re-sell the foil on behalf of the supplier only. This it was bound to do to the extent to which money was still owed. The Defendant Company was consequently liable to account in a fiduciary capacity to the supplier for the proceeds of such sales. As a result of the stance adopted by the Courts in cases such as this, the position between supplier and purchaser would seem ideally balanced. The contract which con- tains a reservation of title clause would seem to successfully repre- sent the intended relationship between the parties and to protect all relevant rights at contract stage. Because it is the function of the Courts to decide what was the intention of the parties at contract stage, the question can sometimes arise as to whether adequate notice of the reservation has been brought to the attention of the purchaser. This question arose in Sugar Distributors Limited -v- Monaghan Cash and Carry Limited* where the parties had been doing busi- ness together for over two years Reservation of Title became the basis on which the Defendant was supplied. Carroll J. held that there was no special duty on the Plaintiff to draw the Defendant's attention specifically to the clause and that because the parties had been trading together on this basis for the fifteen months prior to the dispute, the Plaintiff, by putting the terms on which the goods were supplied on the face of the invoices, gave reasonable notice of the con- ditions applicable, so as to make them valid and binding on the Defendant. In deciding that there was no special duty to bring the clause to the purchaser's notice, Carroll J. was following the principle that a person who signs a document con-

of reservation amount to charges over the purchaser company, the purpose of which are to secure payment of the unpaid purchase price. Accordingly if these charges have not been registered they are void under Section 99 of the Companies Act, 1963. At the same time there is the claim that since the provisions of the reservation of title clause prevent the buyer from ever enjoying any proprietary interest in that material until it has been paid for in full, the purchaser cannot create a charge over property in which he has no proprietary interest. Having listened to these conflict- ing arguments which represent the opposite extremes in the debate, the Courts have had the unenviable task of having to balance the respective rights of the parties, a balance which, in the absence of statutory guidelines, inevitably depends more on the facts of each case than on the strict rule of law. The Courts' Interpretation In Borden (U.K.) Limited -v- Scottish Timber Products Limited* the Purchaser was supplied with resin to be used in the manufacture of chipboard, during which the resin became an inseparable con- tituent of the end-product. The Purchaser went into liquidation by which time all of the resin supplied had been used in the manufactur- ng process. The Supplier relied on the reservation of title clause which reserved title in respect of the resin only and not in respect of any form into which that resin might be converted. The Supplier claimed to be entitled to trace both into the chipboard and into the proceeds of sale of that chipboard to third parties. The Court held that the resin which was the subject of the reservation of title clause had e f f ec t i ve ly been consumed. Because there was nothing in the Contract effective to create any interest in or charge over the newly manufactured chipboard or the proceeds of its sale the clause became redundant. In any case, had the reservation of title clause created such an interest or charge, such interest or charge would have been void for want of registration. The consequence of the Borden Case therefore is that a retention of

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