Fairfax Gerrard Holdings Ltd and others v Capital Bank Plc (now Bank of Scotland Plc by substitution) is a reminder that retention of title clauses are a clumsy and unreliable method of taking security over an asset, including over motor vehicles. Sellers, suppliers and transaction financiers should take note.

The Court of Appeal held that there is no consistency between a simple retention of title clause and an implied term, or even express, right of a buyer to sell on goods before paying the seller.

The case concerned the competing interests in a printing machine of a specialist trade financier, Fairfax, and the financier of the end user, Capital. Fairfax provided the finance to a supplier, Dimond International Limited, for the import of the machine which was then sold to Capital and hired on financial terms to the end user, Carrprint Limited.

The finance agreement between Fairfax and Dimond contained a simple retention of title clause whereby Fairfax purported to retain title to the machine pending payment in full. The agreement provided for an assignment of the invoice to Dimond's customer to Fairfax. It also included a signed standard trust receipt which provided that, in consideration of Fairfax releasing the goods in order that they may be sold, Dimond agreed that the goods remained Fairfax's property until they had been paid for in full. Neither the assignment nor signing of the trust deed took place.

The machine was ultimately delivered to Carrprint. Capital paid Dimond but Dimond went into liquidation before paying Fairfax in full. Seeking a defendant who could honour a judgment, Fairfax successfully sued Capital for conversion of the machine by leasing it to Carrprint and collecting the rentals.

At trial the court accepted Fairfax had retained title to the machine and held there was no express or implied term in the finance agreement for Dimond to sell the machine on. Capital could not rely upon the Ss 2(1) and 9 Factors Act exceptions to the nemo dat quod non habet (you cannot pass better title than you have got yourself) principle of English law as it had notice that Fairfax had financed the import (though not of the exact terms). Capital appealed.

Before the Court of Appeal

Upholding the appeal, the Court of Appeal held that the finance agreement recognised, by implication, that prior to Fairfax being paid, Dimond had the authority to deliver and pass title to its customer. Fairfax's interest then converting to the proceeds of sale which were to be held on trust for it. It was not a precondition to that authority to pass title that Dimond execute an assignment of the invoice to its customer or sign the trust receipt.

There was no inconsistency between a retention of title clause and an implied, or even express, right for a buyer under such a term to sell on goods. Fairfax could only enforce the retention of title clause as against the machine whilst in Dimond's possession and thereafter, on the proceeds of sale.

---

For further information about this published aticle, contact Kathryn Hobbs on +44 (0)121 213 2397, Alexa Highfield on +44 (0)121 213 2396 or Amie Ryalls on +44 (0)121 213 2360

This published article may contain information of general interest about current legal issues, but does not give legal advice.