Court of Appeal overturns Commercial Court on construction of retention of title clause

In a recent decision the Court of Appeal found, by a majority, that the effect of a retention of title clause was that the buyer resold the goods as agent of the seller (and not as principal, as the Commercial Court had found): Caterpillar (NI) Ltd v John Holt & Company (Liverpool) Ltd [2013] EWCA Civ 1232.  As such, the buyer would have to account for the entire proceeds of re-sale and not merely the amount due under the contract. However, since title in the goods had not passed to the buyer, the seller could not maintain an action for the price, which was the only basis on which its claim had been brought. The Commercial Court's order granting summary judgment on the seller's claim was therefore overturned.

Of particular note in this decision is the conflict between what the majority and dissenting judges found to be the "commercial" construction of the retention of title clause.  Permission to appeal to the Supreme Court has however been granted so, if the appeal is pursued, it will be interesting to see how the matter is finally resolved. Joanne Keillor and Akanksha Bhagat consider the case below.

	Joanne Keillor Senior Associate +44 20 7466 2376
	Akanksha Bhagat Graduate solicitor (India) +44 20 7466 2879

Background and first instance decision

The seller, Wilson, contracted with the buyer, Holt, for the sale of generators, spare parts and associated licenses and training for assembly. Holt exported the generators and spare parts to Nigeria and sold them through its majority owned Nigerian subsidiary, Holt Nigeria.

The contract contained two clauses that were at issue:

• A no set-off clause to prevent Holt applying any set-off against the price of the goods: "Buyer shall not apply any set-off to the price of Seller's products without prior written agreement by Seller". 
• A retention of title clause providing that title did not pass until Wilson had been paid in full: "...Notwithstanding delivery and the passing of risk in the products, title shall not pass to Buyer until Seller has received payment in full for the products and all other goods or services agreed to be sold by Seller to Buyer for which payment is then due. Until such time as title passes, Buyer shall hold the products as Seller's fiduciary agent and shall keep them separate from Buyer's other goods. Prior to title passing Buyer shall be entitled to resell or use the products in the ordinary course of business and shall account to the Seller for the proceeds of sale.."

Wilson claimed approximately US$12 million as the price due under the contract. Holt relied on a defence of set-off in respect of its claims in excess of US$53 million for Wilson's alleged breaches of contract. It was accepted that the no set-off clause applied only to an action for the price. The question was therefore whether Wilson could maintain an action for the price.

An action for the price can be brought under section 49 of the Sale of Goods Act 1979 where (1) property in goods has passed to a buyer or (2) the contract provides that the price is payable on a particular day irrespective of delivery (which did not apply here).  Mr Justice Popplewell held at first instance that the property in the goods had passed to Holt, despite the non-payment.  This was on the basis that, as the goods had been sold on by Holt, Wilson had done all that was necessary for Holt to deal with the goods as its own and transfer the property in the goods to a third party.  The judge stated that while Holt had held the goods as an agent of Wilson, in the onward sale it acted as principal and not as an agent.

As such, the judge held that Wilson could maintain an action for the price and the no set-off clause was effective to prevent Holt from relying on its claims for alleged breach as a defence to the claim.  Summary judgment was therefore granted in Wilson's favour.  (See here for our post on the Commercial Court's construction of the "no set-off" clause.)

Decision of the Court of Appeal

By a majority, the Court of Appeal allowed Holt's appeal.  The Court of Appeal agreed with the first instance judge that section 49 specified the only circumstances in which a seller could maintain an action for the price.  As such, unless Wilson could establish that property in the goods had passed to Holt, it would have no claim for the price. The appeal therefore turned on the construction of the retention of title clause and, in particular, whether that clause resulted in title passing to Holt prior to the resale (as Popplewell J had found) or whether Holt sold the goods as agent for Wilson.

The majority (Patten and Floyd LJJ) found that title in the goods had not passed to Holt, which sold as agent for Wilson rather than as principal.  They found that the clause required Holt to account for the entire proceeds of sale and not merely for such proceeds as were required to satisfy Holt's liability for the price under the contract. Such an obligation was consistent with Holt acting as Wilson's fiduciary agent throughout the process of the onward sale. The majority rejected Holt's argument that "the proceeds of sale" should be read as meaning the proceeds of sale necessary to pay the price due to Wilson. That was not what the clause said, and the court should be cautious about reading words into standard conditions of this kind.

The majority dismissed Wilson's argument that such a construction would render the no set-off clause redundant as it would mean a claim for price could never arise.  That argument presumed the "no set-off" clause was directed only to Wilson's ability to sue, whereas it was in fact a provision governing the terms of payment.

Lord Justice Longmore (dissenting) favoured the construction of the clause adopted by the trial judge.  He reasoned that the retention of title clause was intended to operate to give the sellers security over the purchase price rather than to confer on them a potential windfall, as might otherwise occur were the resale amount to exceed the price of the goods. He said that must militate against Holt acting as Wilson's agent on the resale. 

Longmore LJ also agreed (and Patten LJ expressly disagreed) with the trial judge's finding that it would be uncommercial to construe the entirety of the clause as an effective retention of title because it would expose Wilson to liability under the contracts with the sub-purchasers, the terms of which Wilson had no control over. 

The result of the majority decision was that Wilson could not maintain an action for the price, which was the only basis on which it had brought its claim. The order granting summary judgment was therefore overturned.

Drafting implications for retention of title clauses

The Court of Appeal in this case emphasised that the construction of retention of title clauses should be undertaken on a case by case basis and that case law was therefore of limited assistance.  Nonetheless, precedent did appear to play a role in the outcome.  This decision highlights the need to pay careful attention to the drafting of such clauses.  In particular:

• The clause should state expressly whether the buyer will act as principal or as the seller's agent with respect to any on sale before the price is paid.  It may not be sufficient for there to be a general "no agency" clause elsewhere in the contract particularly where (as here) the retention of title clause specifically provides for an agency relationship when the goods are being held by the buyer.
• Commercial parties may also wish to specify a particular date for the payment of the price, irrespective of whether property in the goods has passed. That would allow the seller to maintain an action for the price under section 49 even if property in the goods has not passed.  In this case, the court commented that Wilson's terms and conditions had attempted to do just that - providing that the buyer was to pay within 30 days of the date of the invoice - however subsequent variations were found to have muddied the waters.