Limitations of retention of title clause exposed as it is deemed to be ineffective for stock sold on – Bulbinder Singh Sandhu v Jet Star Retail, High Court

Sandhu supplied clothes to JSR, a retailer. The supply contract contained an ‘all monies’ retention of title clause. That clause provided that title in the goods would not pass to JSR until payment had been made, not just for those goods but also until any other money had been repaid to Sandhu. The contract also provided for a right for Sandhu to terminate the contract and require all sums to become immediately due and payable in the event of an insolvency event affecting JSR. JSR owed money to Sandhu and went into administration. It had obtained 200,000 as yet unpaid items from Sandhu. Sandhu did not attempt to recover the stock but made a claim based on its retention of title clause after the administrators had sold the goods.

The High Court ruled that the retention of title clause was ineffective. A retention of title clause needs to be interpreted in the context of a commercial bargain as a whole. Here, the clause was part of a contract for the sale of stock designed for resale rather than the sale of goods designed for use by a business. The clause was ineffective because it was inconsistent with the parties’ intention for stock to be sold on to customers. The Court added that the termination clause did not help the clause to be enforceable. The Court was particularly influenced by the way the contract had been performed as Sandhu had at no stage sought delivery up of the stock but sought instead to recover monies for the value of the stock sold from the administrators. A retention of title clause is not a right to priority over sales actually made (which would act as a charge) but a right to recover possession of goods.

Paul Gershlick, a Partner at Matthew Arnold & Baldwin LLP and editor of Upload-IT, comments: ‘Our insolvency lawyers often see cases where clients wish to rely on retention of title clauses when their customers have suffered an insolvency type event. Often, those clauses do not give adequate protection. However, we also see clauses which have been inadequately drafted and try to go further than is allowed and this can render the entire clause ineffective.

‘Given the current fragile state of the economy, retention of title clauses are being closely examined at the moment due to the risks of customers defaulting on payment. They should be closely reviewed and updated by suppliers as necessary in light of the ever-changing case law in this area. It should also be realised that those clauses have limitations to their use and should be seen as one tool in a supplier’s armoury that may include short (or no) credit periods, parent guarantees and risk insurance.’