ROT clauses are often found in agreements for the sale of goods whereby a seller seeks to reserve the ownership of those goods until certain conditions are met, usually payment in full. They provide a method of taking security for the seller and an alternative to the taking of a charge, or the use of other secured financial instruments.

ROT clauses remain popular because of their perceived ease of use and incorporation into a sale contract by the use of a simple clause. However, they may not be suitable in every transaction as the below case goes to show.

In Fairfax Gerrard Holdings Limited and others v Capital Bank plc, a printing machine was imported by Dimond International Limited for onwards sale to its customer Carrprint Limited. Both Dimond and Carrprint required finance to complete the transaction. Dimond entered into a finance agreement with Fairfax which contained a simple retention of title clause pending payment in full. The agreement also required an assignment of Dimond's invoice to Carrprint and a signed standard trust receipt.

Carrprint meanwhile entered into a finance agreement with Capital Bank whereby Capital Bank acquired the machine from Dimond and leased it back to Carrprint. Capital Bank paid Dimond but Dimond went into liquidation before paying Fairfax in full. Fairfax sought to rely on the retention of title clause, and argued that it prevented Dimond from passing good title to the machine Capital, and that Capital had thereby converted the machine.

The Court agreed at first instance finding that there was no express or implied term in the finance agreement that provided for Dimond being able to sell the machine before paying Fairfax. Since Capital had notice that Fairfax had financed the import, it could not rely on the assistance of the Factors Act.

However, the Court of Appeal found in favour of Capital Bank. It held that the finance agreement recognised that, by implication, Dimond had the authority to sell and pass title in the machine to Capital Bank, with Fairfax's interest thereafter being in the proceeds of sale which Dimond held on trust for them. It was possible for Fairfax to enforce the ROT clause only insofar as the machine remained in the possession of Dimond.

Comment

ROT clauses often prove to be an unreliable method of taking security over an asset. Sellers, suppliers, and trade financiers should review the appropriateness of using ROT clauses as a means of taking security, particularly in large one off transactions, or where it is envisaged the buyer will sell on the goods.

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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.