A handy little friend to know

Most of us know the adage, possession is nine tenths of the law. Less well known, but arguably more important in insolvency cases, is the “Romalpa clause”. This is vital to suppliers if a purchaser that has received, but not paid for, goods goes bust.

A supplier can use a Romalpa clause to claim to be the continuing owner of the goods so that it can leapfrog other claims. In the Romalpa case itself, the suppliers expressly reserved title until payment was made in full, and required the purchaser to store the goods separately.¹ The Court of Appeal held that this provision was an effective retention of title clause. It has been followed since. Romalpa is dependent on a three-point test: there must be a clear, unambiguous reservation of title in the goods; the goods must not be inextricably linked with other goods, and must be capable of being separated from the property of others; and a fiduciary obligation must be placed on the purchaser by the supplier.

The first requirement was explored in Re Bond Worth.² There, the words used in the retention clause stated that “equitable and beneficial ownership were reserved”. It was held that those words implied title had passed to the purchaser. So, the supplier’s wording failed in that it was attempting to create a charge over assets, which was void, as it required registration under section 395 of the Companies Act 1985. A similar situation arose in the context of glazing units in the case of Stroud Architectural Systems Ltd.³ The second requirement that goods must not be inextricably linked with others was tested in Borden.⁴ In this case, a supplier of resin used by the defendant to make chipboard lost its reservation of title claim. The Court of Appeal held that once the resin was mixed with other products, it could not be separated out. A similar result came in the Peachdart case concerning a supplier of leather to a handbag manufacturer.⁵ It ruled that once the leather became a handbag it was inextricably mixed and there could be no valid reservation of title.

In construction, there is often a provision for the employer to pay the contractor for all materials delivered to site, for instance in JCT80. The client becomes owner of the materials upon payment for them. There is usually a vesting clause under which the contractor undertakes, on being paid for the materials, that ownership will pass to the client.

• Using Romalpa a supplier can leapfrog other insolvency claims
• Goods must not be inextricably mixed with others for the clause to retain its force

Most suppliers are not happy in situations where they must rely on a contractor undertaking to vest ownership of their materials in the employer before they have been paid, which is where the retention of title clause steps in. Suppliers know that when materials are incorporated within the works, they form part of the land owned by the employer and cannot be demolished or dismantled. All they can look to are the unfixed materials. The supplier may demand the right to remove the unfixed materials from site even though he cannot demolish the building work itself.

One remedy available to building employers faced with Romalpa decisions is section 25 of the Sale of Goods Act 1979, although this is not a panacea.

The rule for suppliers of construction materials is to keep the three-fold test ever present in all dealings and ensure that purchasers properly designate their goods. For employers, the message is to keep a very cautious eye on the “purchase” of materials stored, but not fixed, on site and ensure that all consultants have taken careful note of any retention of title provisions and advised accordingly.