Retention of Title Clauses - Court of Appeal
By Philip Stern, Partner
4 August 2010
Summary
Suppliers need to be careful in drafting retention of title ("ROT") clauses to ensure they operate as intended. When making payment, financiers ought identify the goods to which a payment relates to avoid disputes. Insolvency practitioners should take note of how ROT clauses can be challenged. In this case, the supplier's appeal was dismissed, and a third party purchaser had good title.
Facts
In GE Commercial Corporation (Aust) Pty Ltd v Mell Associates Pty Ltd & Ors [2009] NSWSC 787, GE sought declarations that it had title to 58 caravans which it bought from Oakhurst. Oakhurst had purchased them from LMC, the only active defendant. In its cross-claim, LMC sought a declaration that it had title due to ROT clauses. Oakhurst was in liquidation. We only provide pertinent facts for simplicity.
LMC sold goods to Oakhurst pursuant to terms on each invoice. To finance the purchases, Oakhurst entered into agreements with GE, and warranted that upon purchase of the caravans, GE would have clear title. The goods remained on Oakhurst's floor (under a bailment agreement with GE), and GE paid LMC directly, without identifying which caravans were being paid for. Oakhurst informed LMC which caravans were being paid for. Discrepancies arose, leading to this dispute. GE's records show it had paid for the subject 58 caravans, whilst LMC's records show they had not been paid for. The invoiced value of the caravans to LMC was over $2 million.
Lower Court judgment
The Supreme Court of New South Wales held:
- the terms on the back of the LMC invoices were incorporated as terms of sale even though they were in German. Oakhurst never objected or requested a translation.
- ROT-1 and ROT-2 were on the front of the invoices. ROT-1 provided that title in the goods supplied by that invoice remained with LMC until payment. ROT-2 provided that title passed only when all moneys due to LMC during the course of the dealership was paid. The Court held these two ROT clauses were merely reminders that there were ROT clauses on the back, and were not intended to be contractual terms.
- ROT-3 and ROT-4 were on the back of the invoices. ROT-3 provided that LMC retained title until all payments originating from the business relationship from LMC were received. ROT-4 authorised the on-sale in the ordinary course of business and the passing of title, and in effect, assigned to LMC the right to receive the proceeds of sale (up to the value of LMC's invoice). The Court held that in accordance with ROT-4, title in the 58 caravans passed to GE when Oakhurst sold them in the ordinary course of business. GE was entitled to possession.
Court of Appeal
The caravans were sold by GE. LMC relied on ROT-1 to claim it had title to the proceeds as they had not been paid for. The issue was the extent of the authority to on-sell in ROT-4, and whether it applied to cases within ROT-1 (i.e. where goods had not been paid for). In LMC Caravan GmbH & Co KG v GE Commercial Corporation (Australia) Pty Ltd [2010] NSWCA 120 (20 May 2010), the Court of Appeal dismissed the appeal with costs and held:
- ROT-1 and ROT-2 have contractual force. However, ROT-1 should not be read in a way which is entirely unconstrained and uninfluenced by other contractual terms.
- ROT-2 and ROT-3 extended the circumstances in which the ROT would operate.
- ROT-4 meant that Oakhurst could on-sell the goods even if the sale from LMC had not been paid for (and, prima facie, Oakhurst did not have clear title to sell).
- As between Oakhurst and LMC, Oakhurst has not paid for the 58 caravans. However, as between GE and Oakhurst, GE has paid for the caravans. As such, there were no receivables from the sale to cede to LMC by reason of ROT-4.
The Court held that GE was entitled to retain the proceeds of sale. LMC's appeal was dismissed with costs.
Comments
LMC would be entitled to lodge a proof of debt in Oakhurst's liquidation. However, the dividend, if any, may be minimal.
The assistance of Peggy Wong, Solicitor, of Addisons in the preparation of this article is noted and greatly appreciated