Retention Of Title And Fiduciary Relationships

Simple retention of title clauses are commonplace and generally effective in contracts for the sale of goods. However, extending their effect to the proceeds of sale of such goods requires careful drafting.

The Court of Appeal has provided some further clarity around the creation and effects of fiduciary obligations in relation to such clauses.1

Proceeds of sale clauses

It is well established that there is a risk that any attempt to capture the proceeds of sale of goods supplied subject to a retention of title clause, may be construed as a charge and therefore void for want of registration.2

To avoid this conclusion and therefore be entitled to trace the proceeds, the seller must be able to establish a fiduciary relationship between the seller and the buyer. For a period of time there was some doubt as to whether this could be accomplished successfully. However, in Carroll Group Distributors, 3 the High Court stated as follows:

"It seems to me that the question must be asked how does a party come to sell property of which he is not the owner?

· Is he selling as a trustee in pursuance of a power of sale?

· Is he selling as the agent of the true owner?

· Does the sale constitute a wrongful conversion?

If any of those questions were answered in the affirmative it seems to me that the law would impose a trust on the proceeds of sale which would confer on the true owner the...