30 October 2013

Within a week of the Court of Appeal decision (Wilson v Holt) to prevent Caterpillar from claiming for generators it had sold subject to a retention of title clause, the High Court has upheld a Retention of Title Clause in favour of the seller. This underlines the difficulties of Retention of Title clauses, the Factors Act and the Sale of Goods Act and whose benefit they may (in combination) ultimately serve.

It is fair to say that the outcome in Fadallah v Pollak was close and, like Wilson v Holt, depended on some pretty fine distinctions. The lesson from it is that, if you are dealing with Retention of Title clauses, be very careful to understand all the implications of the clause before acting. The effect of the clause and minor factual changes may not be straightforward or as expected. Negotiations over payment dates, whether a representative attends to take possession of goods held to order in a warehouse and the timing of contractual agreements can all have a major effect upon where any costs or losses will fall.

Fadallah v Pollak

Somewhat confusingly, this case (as well as the Caterpillar case) also involved the sale of generators to Nigeria.

Eagle sold some second-hand generators to John Pollak. Pollak had no storage facilities so Eagle agreed to store them for him until he found a buyer. Pollak turned up to see the generators being disconnected from their former use and consigned to Eagle’s warehouse where they were stored separately on his behalf.

Meanwhile Tahir Fadallah asked Eagle to buy some generators. Eagle offered him the generators it was storing for Pollak which he agreed to buy (unaware that Eagle did not own them) for shipping to his hotel in Nigeria. He paid in full.

Eagle asked to re-purchase the generators and Pollak agreed to re-sell them on his own terms and conditions. These included a clause that title would not pass until payment in full was made. Eagle went bust without making full payment to Pollak (hence title never passed). Fadallah sued Pollak for the generators or their value.

Both Fadallah and Pollak were innocent parties who had behaved properly. One would suffer a large loss. Either Pollak would lose his generators without payment or Fadallah would have paid for the generators without obtaining them. In essence the Court’s view was:

  • Subject to provisions in the Factors Act 1889 and elsewhere in the Sale of Goods Act a buyer does not gain better title to goods than the seller had (s21 SofG). Hence, as Eagle was not the owner of the goods when it tried to sell them to Fadallah (because the retention of title clause worked in line with SofG s21), Fadallah could not obtain good title if Eagle did not have it.
  • Under the Factors Act – a ‘mercantile agent’ in possession of goods can transfer good title to a buyer even against the wishes of an owner. Whether the bailee is a mercantile agent is a matter of fact under the definition in the Factors Act (eg does it habitually sell goods for the other party) and in this case those facts were not made out.
  • S24 Sale of Goods allows an on-sale where the seller remains in possession of goods, ie if the seller sells the goods but does not give them up, then sells them again – the second buyer can claim title.
  • Whether the seller remains in possession after a sale is a tricky question. In this case, Mr Pollak had attended to observe the disconnection and transfer of the generators – as such he was considered to have taken possession of the generators at this time. The fact that he subsequently asked Eagle to store them for him in their warehouse did not matter – that storage was a different bailor/bailee arrangement not a continuation of possession after sale (despite the free storage probably being connected to the sale agreement…). Presumably if Mr Pollak had not attended then he might not have taken possession and Eagle would have remained in possession giving them a right to sell them to Fadallah. A fine distinction indeed. It is a good thing Pollak wasn’t on holiday that day.

This continues to appear fairly tough and highly dependent upon fine distinctions of facts and drafting.

To really understand the effect of a retention of title clause you will need to consider, amongst other things, the exact wording of the clause, other provisions regarding the creation of fiduciary relationships and charges, the terms of invoices, terms of the Sale of Goods Act (including s20-24) and the Factors Act 1889, other security arrangements, whether your counterparty could be said to act as your commercial agent and very precisely the timeline and exactly what was said about payment and delivery.

Ian Tucker is a member of our disputes and litigation team.

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Andrew Burnette Partner

  • Dispute Resolution
  • Professional Negligence
  • Banking Disputes

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