A retention of title clause (also called a Romalpa clause in some jurisdictions) is a provision in a contract for the sale of goods that the title to the goods remains vested in the seller until certain obligations (usually payment of the purchase price) are fulfilled by the buyer.

Purpose

The main purposes of retention of title clauses are to ensure that where goods are supplied on credit, if the buyer subsequently goes into bankruptcy

Bankruptcy

Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....

, the seller can repossess the goods. Retention of title clauses are most prevalent in Europe (particularly in Germany

Germany

Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...

). In North America they appear to be less common, and there may be a variety of reasons for this.

Title retention clauses are often seen as a natural extension of the credit economy; where suppliers are expected to sell goods on credit, there is a reasonable expectation that if they are not paid they should be able to repossess the goods. Nonetheless, in a number of jurisdictions, insolvency regimes or credit arrangement regimes prevent title retention clauses from being enforced where doing so would upset administration of the regime.

Legal analysis

Although title retention clauses are conceptually very simple, they have become increasingly widely drafted, which has resulted in the courts in a number of countries striking down the clauses, or recharacterising them as the grant of a security interest

Security interest

A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...

. Several particular problems have resulted:—

• If for example, the clause reserves only part of the title to the seller (instead of reserving title to the whole thing) then in many jurisdictions this is recharacterised
  Recharacterisation
  Recharacterization in law means the treatment of a certain course of conduct in a different manner to which the participants describe it....
  
   as an equitable charge, and is often void if certain registration requirements are not complied with.

• Problems can also arise where the goods sold are mixed with other goods of a similar nature, so that they are no longer identifiable (e.g. a quantity of oil, or grain).

• Many jurisdictions allow the buyer to re-sell the goods before title has passed to him (often this is the only way that he can pay the seller). In many jurisdictions such an onward sale passes good title to the subsequent purchaser, and the original seller loses title despite the clause

• Where the seller tries to have a clause which provides that, if the buyer re-sells the goods, then the proceeds of sale of the goods shall be held on trust for the seller, this can be recharacterised as a registrable charge, which may also be void for non-registration.

• Another frequently litigated problem occurs where the goods which are subject to the clause are then either improved (e.g. raw thread is worked into cloth) or mixed with other raw materials to form a new product (e.g. silica is used to make glass).

• In some countries, where a clause purports to retain title until, not only the purchase price, but also any other debts of the buyer to the seller are paid in full, such clauses have been struck down for non-compliance with security registration requirements in those jurisdictions.

Sample clauses

Retention of title clauses will obviously vary from country to country, and even within countries they will usually be specialised to the form of industry used in, and the type of goods which are sold. The following are just two examples of the types of clause which can be seen.

A shorter form clause:

1. Title to {the Goods} shall remain vested in {the Seller} and shall not pass to {the Buyer} until the purchase price for {the Goods} has been paid in full and received by {the Seller}.

A longer form clause:

1. Title to {the Goods} shall remain vested in {the Seller} and shall not pass to {the Buyer} until the purchase price for {the Goods} has been paid in full and received by {the Seller}. Until title to {the Goods} passes:
   1. {the Seller} shall have authority to retake, sell or otherwise deal with and/or dispose of all or any part of {the Goods};
   2. {the Seller} and its agents and employees shall be entitled at any time and without the need to give notice enter upon any property upon which {the Goods} or any part are stored, or upon which {the Seller} reasonably believes them to be kept;
   3. {the Buyer} shall store or mark {the Goods} in a manner reasonably satisfactory to {the Seller} indicating that title to {the Goods} remains vested in {the Seller}; and
   4. {the Buyer} shall insure {the Goods} to their full replacement value, and arrange for {the Seller} to be noted on the policy of insurance as the loss payee.
2. Irrespective of whether title to {the Goods} remains vested in {the Seller}, risk in {the Goods} shall pass to {the Buyer} upon delivery.

Case list

• Aluminium Industrie Vaassen BV v Romalpa Alumnium Ltd
  Aluminium Industrie Vaassen BV v Romalpa Alumnium Ltd
  Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676 is a UK insolvency law case, concerning a quasi-security interest in a company's assets and priority of creditors in a company winding up.-Facts:...
  
  [1976] 1 WLR 676
• Re Peachdart [1984] Ch 131, if the clause applies to something not yet made, then it is a charge and must be registered to be effective.
• Clough Mill Ltd v Martin [1984] 3 All ER 982, explaining how a simple clause operates.
• Indian Oil v Greenstone Shipping [1987] 3 WLR 869
• E Pfeiffer v Arbuthnot Factors [1988] 1 WLR 150
• Compaq Computer v Abercorn [1991] BCC 484
• Armour v Thyssen [1991] 2 AC 339