In Re Peachdart Ltd

[1984] Ch. 131
[No. 003812 of 1982]

(Judgment by: Vinelott J (including background))

In Re Peachdart Ltd

Court:
Chancery Division

Judge:
Vinelott J

Subject References:
SALE OF GOODS
RETENTION OF TITLE
RIGHTS OF RESALE AND TRACING
Conditions of sale reserving title to goods until payment in full
Goods subject to manufacturing process
No obligation to keep unpaid goods separate
Buyers in receivership
Whether seller having exclusive title to products manufactured from such goods
Whether agreement creating registrable charge over manufactured product

Legislative References:
Companies Act 1948 (11 & 12 Geo. 6, c.38) - s.95

Case References:
Aluminium Industrie Vaassen B.V. v. Romalpa Aluminium Ltd - [1976] 1 W.L.R. 676; [1976] 2 All E.R. 552, Mocatta J. and C.A.
Bevington and Morris v. Dale and Co. Ltd - (1902) 7 Com.Cas. 112
Bond Worth Ltd., In re - [1980] Ch. 228; [1979] 3 W.L.R. 629; [1979] 3 All E.R. 919
Borden (U.K.) Ltd. v. Scottish Timber Products Ltd - [1979] 2 Lloyd's Rep. 168; [1981] Ch. 25; [1979] 3 W.L.R. 672; [1979] 3 All E.R. 961; [1980] 1 Lloyd's Rep. 160, C.A.
Hallett's Estate, In re - (1880) 13 Ch.D. 696, Fry J. and C.A.
Holroyd v. Marshall - (1862) 10 H.L.Cas. 191, H.L.(E.)
Percy Edwards Ltd. v. Vaughan - (1910) 26 T.L.R. 545, C.A.
South Australian Insurance Co. v. Randell - (1869) L.R. 3 P.C. 101, P.C.
Wait, In re - [1927] 1 Ch. 606, C.A.
White, Ex parte, In re Nevill - (1870) L.R. 6 Ch.App. 397, C.A.

Hearing date: 9-10 March 1983
Judgment date: 11 March 1983

Judgment by:
Vinelott J (including background)

The seller supplied leather to the buyer, a company which manufactured handbags. The conditions of sale contained title retention clauses which provided that, until payment was received in full the seller retained ownership of the leather including the right of resale if payment was overdue, and had the right to trace any proceeds of sale by the buyer including any goods made with the leather, by the creation of a fiduciary relationship between buyer and seller. In August 1981, the company's bankers appointed a receiver under a debenture granted to them by the company in January 1980, duly registered under section 95 of the Companies Act 1948, under which all the company's book debts were made subject to a fixed charge and stock to a floating charge.

By an originating summons the receiver sought directions for the determination of whether the title retention clauses gave a priority interest or charge to the seller over the debenture holder preferential creditors and unsecured creditors in respect of the proceeds of sale of, inter alia, the completed and uncompleted handbags sold since the receiver's appointment and the handbags sold before his appointment but for which no payment had been received:-

Held, that the true construction of the conditions of sale contemplated an intention by the parties, once the leather had been appropriated into the handbag making process, for the seller, whether as bailor or unpaid vendor, to cease to have exclusive title to the leather and instead to have a charge over the completed and uncompleted handbags including any proceeds of sale; that, since the charge had not been registered pursuant to section 95 of the Companies Act 1948, it was void and accordingly, the seller had no priority over the debenture holder and other creditors in respect of the proceeds of sale (post, pp. 142C - 143D).

Aluminium Industrie Vaassen B.V. v. Romalpa Aluminium Ltd. [1976] 1 W.L.R. 676, C.A. and Borden (U.K.) Ltd. v. Scottish Timber Products Ltd. [1981] Ch. 25, C.A. considered.

ORIGINATING SUMMONS

By an originating summons dated 6 August 1982 Nicholas Lyle, the receiver and manager of Peachdart Ltd. (the company) applied to the court to determine, inter alia, whether the sellers, Freudenberg Leather Co. Ltd., by virtue of their conditions of sale under clause 11 had on the appointment of the receiver an interest or charge on

(i)
unused leather supplied by Freudenberg to the company at the company's premises at the date of the appointment of the receiver
(ii)
handbags manufactured by the company at its premises and unsold at the date of the appointment of the receiver, incorporating leather supplied by Freudenberg
(iii)
uncollected invoices payable to the company in respect of handbags manufactured by the company incorporating leather supplied by Freudenberg;

whether any such charge or interest was valid and enforceable and/or had priority against or over the bank, as debenture holder, having been registered against the company under the provisions of section 95 of the Companies Act 1948 and whether the receiver was accountable for the unused leather, handbags and uncollected invoices.

The facts are stated in the judgment.

Simon Mortimore for the receiver. This case raises issues not comprehensively decided by the three principal authorities, Aluminium Industrie Vaassen B.V. v. Romalpa Aluminium Ltd. [1967] 1 W.L.R. 676; In re Bond Worth Ltd. [1980] Ch. 228 and Borden (U.K.) Ltd. v. Scottish Timber Products Ltd. [1981] Ch. 25. It is conceded that the seller reserved title to the unused leather sold to the company and that the receiver must repay the sum of £1,400 in this respect, but there is a dispute as regards manufactured and partly manufactured handbags and book debts arising out of sales of such goods.

Jeffrey Littman for the seller. The sums claimed by the seller are not book debts and the seller has lost if only an equitable claim can be raised. The company is collecting the money in a fiduciary capacity as a bailee or agent as stated by Mocatta J. in the Romalpa case which argument was adopted by the Court of Appeal [1967] 1 W.L.R. 676. Although in this case the company may be acting as a quasi-bailee or agent this is only a semantic difference.

Mortimore. It is necessary to construe the contract to discover the substance from the language and plain meaning of the words, as in In re Bond Worth Ltd. [1980] Ch. 228, which supports the proposition that the nature and whole substance of the transaction must be looked at. Whilst accepting that the seller has reserved the title in the unused leather (see Borden (U.K.) Ltd. v. Scottish Timber Products Ltd. [1981] Ch. 25), it is not the legal owner of the manufactured and partly manufactured handbags. The seller has no right to trace into mixed goods; the agreement does not give a right to trace under a contract of sale and on any view the company was selling on as a principal. Apart from the reservation of title clause the seller has no equitable interest in the handbags whether partly or fully manufactured. This is not a case of bailment, agency or other fiduciary relationship, once the leather is used it becomes untraceable and tracing would produce inequitable results. It is impossible to say which lots of leather were used in which bags. The reservation of title clause gives an equitable interest in the manufactured and partly manufactured handbags by virtue of a charge not trust and, accepting the reasoning of Slade J. in In re Bond Worth [1980] Ch. 228, this creates an equitable interest in the book debts which comes after the bank's fixed charge.

Bailment ceases as soon as the goods are in the process of manufacture. In Aluminium Industrie Vaassen B.V. v. Romalpa Aluminium Ltd. [1976] 1 W.L.R. 676 the aluminium foil was unmixed and in Borden (U.K.) Ltd. v. Scottish Timber Products Ltd. [1979] 2 Lloyd's Rep. 168 the argument that there was co-ownership of the chipboard failed. The leather was not sold on a sale or return basis, the risk passed immediately and there was no requirement for the leather to be kept separate or distinct as in Romalpa.

Although, unlike the resin in Borden, the leather in the handbags can still be seen and was not totally destroyed, there are no pieces of leather which can be sold as such. The skins have lost their original identity and a completely new object has been created. The reservation of title clause applies where any debt is owing to the seller, if £1 is owing all the handbags would belong to the seller who can trace all the proceeds of sale which makes the clause look like a charge. The company, under the clause, would get good title as it shows that it would be selling as principal, and the proviso for re-entry was very much like enforcing the crystallisation of a floating charge. The clause highlighted that what the seller wanted was security in the case of insolvency. There was no obligation by the company to keep a separate record of the manufactured goods and no restriction on price or the way the company could use the proceeds of sale and no right to call on the company to assign its book debts. Any such clause would not have worked because of the bank's fixed charge. There is only a right to trace but it is not clear what can be traced.

Romalpa [1976] 1 W.L.R. 676 can be distinguished since that case was not concerned with mixed goods; the right to trace was based on bailment or agency and there was no other fiduciary relationship discussed giving rise to tracing. In fact in Romalpa it was unnecessary to show bailment. In this case there is an agreement for sale with a reservation of title clause which reserves the right of disposal. Section 25 of the Sale of Goods Act 1979 gives a bona fide purchaser a good title. It is different to a sale or return contract in that there one has a bailment because one must pay or return; see Percy Edwards Ltd. v. Vaughan (1910) 26 T.L.R. 545.

A bailee has a duty of care which is inconsistent where there is no obligation to keep the goods separate as in this case. Section 95 of the Companies Act 1948 never arose in Romalpa because the goods were not the property of the company. In Borden (U.K.) Ltd. v. Scottish Timber Products Ltd. [1981] Ch. 25 there was no proper bailment whilst in In re Bond Worth Ltd. [1980] Ch. 228, the only difference was the immediate grant of a legal title with a grant back in equity. In my submission the seller is not the legal owner of the handbags which are mixed goods as in Borden.

The requirements for transfer of the legal title are contained in Benjamin's Sale of Goods, 2nd ed. (1981), paras. 350, 360-362. The clause dealing with mixed goods only transfers an equitable interest. It is possible to create an equitable interest in future goods by charge or otherwise; see Holroyd v. Marshall (1862) 10 H.L.Cas. 191. That all the seller has is an equitable interest in the manufactured goods is borne out by the company selling on as principal (In re Waite [1927] 1 Ch. 606) the company having freedom to deal with them, the seller having no legal interest in either the mixed goods or therefore in the book debts.

Bailment is inequitable because of South Australian Insurance Co. v. Randell (1869) L.R. 3 P.C. 101; Agency is inappropriate because of Ex parte White, In re Nevill (1871) L.R. 6 Ch.App. 397 and there is no other basis on which the company's fiduciary relationship with the seller can be based. My submissions are the same as the company's counsel in Borden [1981] Ch. 25, there is no right to trace, the goods are untraceable once made up into handbags and still less can one trace the proceeds of sale. It makes no difference that one can see the leather. The equitable right created by the reservation of title clause is not a trust but a floating charge; see In re Bond Worth Ltd. [1980] Ch. 228.

Littman. The ratio of Aluminium Industrie Vaassen B. V. v. Romalpa Aluminium Ltd. [1976] 1 W.L.R. 676 is bailment. In this case there is no reason to suppose that the seller knew with certainty whether the leather was to be made into handbags or sold on unused. The terms of the contract contemplate these possibilities and the title reservation clause distinguishes between the sale of the leather and sale of goods in which the leather is incorporated. The seller is the bailee of the unused leather as in Romalpa but perhaps it is more apt to say that in this case there is a quasi-bailment whereby the company remained a bailee of the handbags throughout the process of manufacture, since the categories of fiduciary relationship are not closed. The seller retains the legal and equitable title to the leather throughout since all that happens to the skins is that in accordance with design they are shaped, cut and sewn. The leather incorporated into the handbag can be identified. South Australian Insurance Co. v. Randell, L.R. 3 P.C. 101, is the accepted test of bailment involving the right to take back property in the same or altered form, and is a case relied upon.

On the facts Borden (U.K.) Ltd. v. Scottish Timber Products Ltd. [1981] Ch. 25 is different from this case because changing form is not destruction or consumption and is therefore within the test of bailment in the South Australian Insurance case.

Further, commercial people may agree such terms as they wish regarding the legal property in the goods so long as they are not repugnant to their intention (Bevington and Morris v. Dale and Co. Ltd. (1902) 7 Com.Cas. 112, in respect of trade custom, and see Percy Edwards Ltd. v. Vaughan, 26 T.L.R. 545). If goods, augmented or not, on a true construction remain the seller's legal property then the buyer receives the proceeds of subsale in a fiduciary capacity.

These parties did not define fiduciary duty, knowing it was the seller's property and that the company would have to account. The proceeds are traceable on the principle of In re Hallett's Estate, 13 Ch.D. 696, a self-evident part of Romalpa's ratio decidendi. The power to trade is not needed until the goods in which the legal title vests changes. The owner of the handbags can trace all the proceeds. The seller does not need to invoke the remedy of tracing until the goods in which it has the legal title are sold, but it can claim the right to trace proceeds into the bank account into which the receiver has paid them. It does not matter that the sale is made as a bailee or an agent as in Romalpa, or both, or even as a quasiagent or bailee, because there is a fiduciary relationship in any event.

It is conceded that a beneficial interest does not help the seller because of the Bills of Sale Act 1891 and section 95 of the Companies Act 1948. Legal ownership was never lost and extends to the manufactured and partly manufactured handbags; alternatively the ownership of the leather is kept until the moment of sale. Bridge L.J.'s words in the Court of Appeal in Borden (U.K.) Ltd. v. Scottish Timber Products Ltd. [1981] Ch. 25 strengthen the seller's claim that property in finished goods is the property of the seller; and also those of Rubin J. in Borden at first instance [1979] 2 Lloyd's Rep. 168.

Effect should be given to the intention. On the facts the express reservation of the legal title allows all property including extra trimmings to be that of the seller, similar to fixtures in land law. Express contractual provisions can overcome the defect in Borden which prevented tracing into mixed goods when such goods are converted into money or on subsale. One cannot trace that which loses its character or is consumed or destroyed because something new arises; resin which ceases to be resin cannot be traced, but in this case identification is possible. There is a specifically enforceable contract for consideration to give the trimmings incorporated into the leather to the seller. There is no authority for the assertion that the company sells on as principal.

As in Romalpa the company is a bailee whilst the property is in its possession and remains a bailee whilst converting the goods (see the South Australian Insurance case, L.R. 3 P.C. 101), so that the seller has the legal title to the leather. Bailment is inconsistent with destruction or consumption but it is consistent until the goods are sold on, as in Romalpa [1976] 1 W.L.R. 676, with the annexation to goods of other things as in cases of repair and with cutting or alteration. The distinction between Romalpa and Borden is that in the latter case the goods were going to lose their identity; there was no attempt to annex ownership of altered goods, the contract only dealt with the resin. In this case the seller has the right to take back goods under the reservation of title clause. Bond Worth was doomed by section 95 of the Companies Act 1948. There was no provision for separate storage as in Romalpa because of the nature of the goods.

Mortimore in reply. There are two concepts:

(1)
the products, goods sold under the invoice, in this case the leather;
(2)
other goods into which the products are incorporated, in this case the handbags.

The seller's rights are translated from (1) to (2) as effected by the wording of the clause. Passages in Borden at first instance [1979] 2 Lloyd's Rep. 168 show that there cannot be common legal ownership of mixed goods; the only remedy is damages. The basic contract is one of sale and there is a right in certain circumstances to acquire the handbags; see the definition of bailment in Benjamin's Sale of Goods, 2nd ed., (1981), paras. 55 and 56.

Judgment of Vinelott J.

This is an application by the receiver of a company, Peachdart Ltd. ("the company") which formerly carried on the business of manufacturing handbags. The question is whether the respondent, Freudenberg Leather Co. Ltd. ("Freudenbergs") who supplied leather for the manufacture of the handbags is entitled under a retention of title clause in the conditions of sale governing the supply of the leather to claim, in priority to the holder of the debenture under which the receiver was appointed and to preferential creditors, first the proceeds of sale of a stock of unused leather in the possession of the company when the receiver was appointed; secondly the proceeds of sale of handbags, some completely and some partly manufactured when the receiver was appointed and since sold by him; and thirdly the proceeds of sale of handbags which had been sold by the company before the receiver was appointed but for which the company had not been paid when he was appointed.

The facts which give rise to these questions are shortly as follows. On 21 January 1980 the company (which until December 1981 when the right to use its original name was sold was called S. Launer & Co. (London) Ltd.) granted a debenture to Barclays Bank Ltd. to secure all moneys for the time being owed by the company to the bank. The debenture was in the bank's standard form. By clause 3 of the debenture the company charged by way of first fixed charge all freehold and leasehold property to become vested in the company, together with all buildings, fixtures, fixed plant and machinery from time to time thereon and its goodwill and un-called capital, and also by way of first fixed charge all book debts and other debts then or from time to time becoming due to the company, and by way of floating charge all other undertakings and assets of the company:

"but so that the company is not to be at liberty to create any mortgage or charge upon and so that no lien shall in any case or in any manner arise on or affect any part of the premises either in priority to or pari passu with the charge hereby created."

The debenture contained a usual provision for the appointment of a receiver. The charge created by the debenture was duly registered pursuant to section 95 of the Companies Act 1948 on 11 February 1980. The receiver was appointed on 10 August 1981. He duly took possession of the assets of the company, which comprised trade debts owed to the company under contracts for the supply of handbags which had been delivered amounting to £27,317, leather and leather goods (the manufactured or partly manufactured handbags) valued in the statement of affairs at £7,500, plant, machinery, furniture and fittings valued at £8,500, and a motor car valued at £1,200. The debt due to the bank amounted to over £64,000. Debts owed to preferential creditors amounted to nearly £50,000. The company owed Freudenbergs some £16,200, and other unsecured creditors approximately £26,000.

Freudenbergs claim to be entitled under the title retention clause to the moneys recovered by the receiver from the trade debtors (all these debts arose on the sale of handbags which had been delivered before the receiver was appointed) and to the proceeds of the sale by the receiver of the unused leather and the completed or partly completed handbags in the possession of the company when he was appointed. The receiver has in fact sold the unused stock of leather to Freudenbergs for £1,400 on terms that that sum will be reimbursed to Freudenbergs if they establish that they retained title to it under the retention of title clause, in which event Freudenbergs will, of course, have purchased their own goods. The stock of manufactured and partly manufactured handbags has been sold and realised a little under £1,500. The unused leather and the handbags and partly completed handbags were not, of course, the subject of any fixed charge in the debenture and the proceeds of sale of those items (if Freudenbergs cannot establish prior title under the title retention clause) will be payable to the preferential creditors who will rank before the bank's floating charge by virtue of section 94 of the Companies Act 1948. To save costs Mr. Mortimore, who appeared for the receiver, has in effect represented the interests of the bank, which relies upon the first fixed charge in clause 3(c) of the debenture as regards the book debts, and the preferential creditors in opposing Freudenbergs' claim.

Freudenbergs supplied the company with substantially all its requirements of leather for use in the manufacture of handbags. I should observe in passing that the company manufactured only high quality leather handbags. In practice, Freudenbergs sold leather to the company as and when required on the terms of their standard general conditions of sale. It is common ground that these terms were incorporated into each contract for the supply of each parcel of leather.

The conditions of sale are printed on the reverse side of Freudenbergs' standard form of invoice in microscopic print. I have fortunately been supplied with a typed copy which in normal print runs to nearly eight foolscap pages. I need only refer to a few of the conditions. Condition 1 (a) defines "seller" as Freudenbergs. "The products" as "the products to which this document relates" and "buyer" as the customer buying the products. Clause 2 (a) provides that

"Unless otherwise agreed all payments are due immediately on delivery without any deductions."

It was not "otherwise agreed" in this case. Condition 10 (a) provides that the seller is to be entitled to interest at two per cent. over Bank of England minimum lending rate on overdue payments. Part of the sums claimed by Freudenbergs represent interest. Condition 11 I should read in full:

"(a)
The risk in the products shall pass to the buyer.

(i)
When the seller delivers the products in accordance with the terms to the buyer or its agent or other person to whom the seller has been authorised by the buyer to deliver the products or
(ii)
if the products are appropriated to the buyer but kept at the seller's premises at the buyer's request and the seller shall have no responsibility in respect of the safety of the products thereafter and accordingly the buyer should insure the products thereafter against such risks (if any) as it thinks appropriate.

(b)
However the ownership of the products shall remain with the seller which reserves the right to dispose of the products until payment in full for all the products has been received by it in accordance with the terms of this contract or until such time as the buyer sells the products to its customers by way of bona fide sale at full market value.
If such payment is overdue in whole or in part the seller may (without prejudice to any of its other rights) recover or resell the products or any of them and may enter upon the buyer's premises by its servants or agents for that purpose. Such payment shall become due immediately upon the commencement of any act or proceeding in which the buyer's solvency is involved.
If any of the products are incorporated in or used as material for other goods before such payment the property in the whole of such other goods shall be and remain with the seller until such payment has been made or the other goods have been sold as aforesaid and all the seller's rights hereunder in the products shall extend to those other goods.
(c)
Until the seller is paid in full for all the products the relationship of the buyer to the seller shall be fiduciary in respect of the products or other goods in which they are incorporated or used and if the same are sold by the buyer the seller shall have the right to trace the proceeds thereof according to the principles in In re Hallett's Estate [(1880)13 Ch.D. 696].
A like right for the seller shall apply where the buyer uses the products in any way so as to be entitled to payment from a third party."

The effect of similar title retention clauses has been considered in a group of recent cases. They are in chronological order the decisions of Mocatta J. and of the Court of Appeal in Aluminium Industrie Vaassen B.V. v. Romalpa Aluminium Ltd. [1976] 1 W.L.R. 676 (the Romalpa case); the decision of Judge Rubin sitting as a High Court judge, in Borden (U.K) Ltd. v. Scottish Timber Products Ltd. [1979] 2 Lloyd's Rep. 168; the decision of Slade J. in In re Bond Worth Ltd. [1980] Ch. 228 and the decision of the Court of Appeal in the Borden case [1981] Ch. 25.

None of the title retention clauses considered in those cases is in precisely the same terms as the title retention clause in clause 11 of Freudenbergs' general conditions of sale. The nearest is the clause considered by Mocatta J. and the Court of Appeal in the Romalpa case [1976] 1 W.L.R. 676. But there is this vital difference. In Romalpa the question was whether the vendor could recover from the receiver first aluminium foil supplied by it which had not been used by Romalpa in any process of manufacture and which under the terms on which it was supplied had to be stored in such a way that it was clearly the property of the vendor, and secondly the proceeds of sale of aluminium foil which similarly had not been used in any process of manufacture and which had been sold by Romalpa before the receiver was appointed. The receiver had received and paid the proceeds of sale into a separate account with Romalpa's bankers and the vendors claimed to be entitled to the moneys in the account which were less than the unpaid balance of the price of aluminium supplied. There was a preliminary issue whether the title retention clause had been incorporated into the contract for the supply of the aluminium foil in question. It was conceded on behalf of the receiver that if, as was held by Mocatta J. and the Court of Appeal, the retention of title clause was so incorporated then Romalpa became and remained a bailee of any aluminium foil delivered to it, pending payment in full of all moneys due by Romalpa under contracts for the supply of aluminium foil, and that the vendor was accordingly entitled to recover the unused aluminium foil in the possession of the receiver. It was held in the Court of Appeal that Romalpa had an implied power to sell as agent for the vendor unused aluminium foil which remained the property of the vendor. It followed that Romalpa, and after his appointment the receiver, were accountable for the proceeds of sale. Roskill L.J. said, at p. 690:

"I see no difficulty in the contractual concept that, as between the defendants and their sub-purchasers, the defendants sold as principals, but that, as between themselves and the plaintiffs, those goods which they were selling as principals within their implied authority from the plaintiffs were the plaintiffs' goods which they were selling as agents for the plaintiffs to whom they remained fully accountable. If an agent lawfully sells his principal's goods, he stands in a fiduciary relationship to his principal and remains accountable to his principal for those goods and their proceeds. A bailee is in like position in relation to his bailor's goods. What, then, is there here to relieve the defendants from their obligation to account to the plaintiffs for those goods of the plaintiffs which they lawfully sell to sub-purchasers? The fact that they so sold them as principals does not, as I think, affect their relationship with the plaintiffs; nor (as at present advised) do I think - contrary to Mr. Price's argument - that the sub-purchasers could on this analysis have sued the plaintiffs upon the sub-contracts as undisclosed principals for, say, breach of warranty of quality."

It was argued before Mocatta J. that if the vendor succeeded in its tracing claim it would, in effect, have found a way of avoiding section 95 of the Companies Act 1948. Mocatta J. held that section 95(1) had no application on the ground that if the property in the aluminium foil never passed to Romalpa the proceeds of the sub-sales belonged in equity to the vendor and were not the subject of any charge. On that analysis the vendor remained the legal owner of the goods supplied until payment for these goods and any goods supplied in like terms; the title would pass only on payment of any outstanding balance and the purchaser's right to claim the property in the goods would be a contractual right under the contract of sale and not an equity of redemption. No reference was made to section 95 in the Court of Appeal.

In Romalpa the second part of the title retention clause (dealing with the title to mixed or manufactured goods and the sale of them in the ordinary course of business) was relied on to support the implication of a power for Romalpa to sell the unused aluminium foil as agent for the vendor. But the question whether the vendor could claim to be entitled to or to a charge on mixed or manufactured goods was not in issue.

That was the question in issue in Borden (U.K.) Ltd. v. Scottish Timber Products Ltd. [1981] Ch. 25. But in that case the title retention clause provided only that the property in goods supplied by the vendors (resin for use in making chipboard) under any given contract of sale for the supply of resin would pass only on payment in full for all resin supplied under that or any other contract for the supply of resin. The claim by the vendor was a bold claim to trace resin which under the title retention clause remained the property of the vendor up to the time when it was used in the manufacture of chipboard into the chipboard and the proceeds of sale of the chipboard. The purchaser was clearly entitled to use the resin in the manufacture of chipboard and to do so notwithstanding that moneys were still due to the vendor of the resin and that the property in the resin accordingly remained with the vendor. When used the resin ceased to exist as a separate or separable constituent of the chipboard.

The Court of Appeal accordingly had little difficulty in holding that when the resin became an inseparable ingredient of the chipboard the vendor no longer had any property in it and that the title retention clause did not preclude the purchaser from selling the chipboard, receiving the purchase price and employing the proceeds of sale in its business. Templeman L.J. said, at p. 44, that the property in the resin

"could be retained by the plaintiffs, and was retained only as security for the payment of the purchase price and other debts incurred, and to be incurred, by the defendants to the plaintiffs in respect of supplies of resin ... When the resin was incorporated in the chipboard, the resin ceased to exist, the plaintiffs' title to the resin became meaningless and their security vanished. There was no provision in the contract for the defendants to provide substituted or additional security. The chipboard belonged to the defendants."

Bridge L.J. rejected the argument which had succeeded in the court below that the purchaser was a bailee of the resin. He said, at p. 35, that in circumstances where

"it was never intended that the resin should be recovered, either in its original or in its altered form or at all, it seems to me quite impossible to say that this was a contract of bailment. The contract was essentially one of sale and purchase, subject only to the reservation of title clause, whatever its effect may have been."

That conclusion seems to me implicit also in the passage from the judgment of Templeman L.J. which I have read. Buckley L.J. left open the question whether while the resin remained in the possession of the purchaser in the state in which it was supplied the purchaser was a bailee of it. He said, at p. 46:

"Common ownership of the chipboard at law is not asserted by the defendants; so the plaintiffs must either have the entire ownership of the chipboard, which is not suggested, or they must have some equitable interest in the chipboard or an equitable charge of some kind upon the chipboard. For my part I find it quite impossible to spell out of this condition any provision properly to be implied to that effect. It was impossible for the plaintiffs to reserve any property in the manufactured chipboard, because they never had any property in it; the property in that product originates in the defendants when the chipboard is manufactured. Any interest which the plaintiffs might have had in the chipboard must have arisen either by transfer of ownership or by some constructive trust or equitable charge, and, as I say, I find it impossible to spell out of this condition anything of that nature."

In the instant case Mr. Mortimore concedes that the property in the unused stock of leather which came into the hands of the receiver when he was appointed remained with Freudenbergs. He submits that the company was not strictly a bailee but (like the purchaser in Borden's case) a purchaser under an agreement to sell under the terms of which agreement the property in each parcel of leather was to pass only on payment of the price for that parcel. The company if it sold had implied authority to sell the leather or to use it in the manufacture of handbags. On a sale of the unused leather the sub-purchaser, of course, would obtain a good title under section 25(1) of the Sale of Goods Act 1979.

Mr. Littman, who appeared for Freudenbergs, submitted that the company was a bailee of each parcel of leather pending payment in full of the price of that parcel. He pointed out that the concession by counsel for Romalpa that Romalpa was a bailee of the unused aluminium foil was accepted by the Court of Appeal as properly made and submitted that there was no material difference between the first part of the title retention clause in the instant case and the first part of the title retention clause considered in the Romalpa case.

Indeed the instant case is in one respect even stronger than that considered in the Romalpa case in that under clause 11(b) Freudenbergs have the right to enter the premises of the company and to take away "the products" if not fully paid for. The only other material difference is that in the instant case there is no specific provision corresponding to the provision in the Romalpa case requiring the purchaser to store the materials supplied in such a way that it was clearly the property of the vendor. Mr. Littman submitted that no such requirement was needed in a case where the material supplied under each contract would inevitably remain separate and easily identifiable. He informed me that in practice a person skilled in the leather trade could identify without difficulty any given skin as that sold under a particular contract, and indeed could do so even after it had been made into a handbag. However, for reasons which will later appear, I do not find it necessary to decide whether in this case the company was strictly a bailee of the unused leather.

Turning to the partly or wholly manufactured handbags and the proceeds of sale of those sold before the receiver was appointed, Mr. Littman's submission was shortly as follows. It was said that under the terms of the bailment of each parcel of leather supplied by Freudenbergs pending payment in full of the price for that parcel the company as bailee was entitled to use the leather in the manufacture of handbags, a process which involved cutting and shaping and sewing a piece of leather and attaching to it hinges, handles, clasps and the like, in the course of which the piece of leather would remain identifiable throughout. The thread and attachments which were, it was said (and I do not think it is disputed) of comparatively minor value, then became the property of Freudenbergs as accessories to the leather.

Thus the company remained a bailee of the handbags throughout the process of manufacture, and when the company sold the handbag it sold it (as in Romalpa) as agent for Freudenbergs, and was accordingly accountable to Freudenbergs as owner for the entire proceeds of sale. Freudenbergs was not entitled to a mere charge. Mr. Littman instanced as an analogy a sportsman who having shot a rare animal takes the skin to a leather worker and instructs him to make it into a game bag. There the property in the skin would remain with the sportsman notwithstanding that the skin would undergo many operations and would have thread and other material added to it. He distinguished the Borden case on the ground that in that case the resin was inevitably consumed and destroyed as a separate substance when used in the manufacture of chipboard. The title retention clause accordingly did not purport to vest the property in the chipboard in the vendor, and if it had done so the vesting could only have been by way of equitable transfer of something not in existence when the resin was sold.

To my mind it is impossible to suppose that in the instant case, even assuming in Freudenbergs' favour that the company became a bailee of the leather when it was first delivered to it, the parties intended that until a parcel of leather had been fully paid for the company would remain a bailee of each piece of leather comprised in the parcel throughout the whole process of manufacture, that Freudenbergs should have the right until the parcel had been fully paid for, to enter the company's premises and identify and take away any partly or completely manufactured handbag derived from it, and that on the sale of a completed handbag the company would be under an obligation to pay the proceeds of sale into a separate interest bearing account and to keep them apart from their other moneys and not employ them in the trade.

It may be that, as Mr. Littman asserts, an expert in the leather trade could identify each handbag whether partly or completely manufactured as made from a skin comprised in a particular parcel of leather. But after a handbag had been sold it would be impossible to do so. There is nothing in the conditions of sale which requires the company to keep a record of handbags sold so as to identify those of which it was a bailee and agent of Freudenbergs. No such records were in fact kept and there is nothing in the evidence which suggests that the parties contemplated that they would be. Indeed on the facts of this case it would be impossible for Freudenbergs now to prove that the handbags sold by the company but not paid for when the receiver was appointed were in fact made out of leather comprised in any of the parcels to which the unpaid invoices relied on by Freudenbergs relate.

It seems to me that the parties must have intended that at least after a piece of leather had been appropriated to be manufactured into a handbag and work had started on it (when the leather would cease to have any significant value as raw material) the leather would cease to be the exclusive property of Freudenbergs (whether as bailor or as unpaid vendor) and that Freudenbergs would thereafter have a charge on handbags in the course of manufacture and on the distinctive products which would come into existence at the end of the process of manufacture (the value of which would be derived for the most part from Mr. Launer's reputation and skill in design and the skill in his workforce). The charge would in due course shift to the proceeds of sale. That I accept does some violence to the language of clause 11(b) in so far as that clause provides that,

"The property in the whole or such other goods shall be and remain with the seller" (my emphasis).

I do not think that those words compel the conclusion that the company was to be a mere bailee throughout the whole process of manufacture until the whole purchase price of the relevant parcel had been paid, and that on a sale before that time it would be no more than an agent for Freudenbergs. The language is, I think, consistent with the view that once the process of manufacture had started so that in the course of manufacture work and materials provided by the company would result in the leather being converted into (that is incorporated in or used as material for) other goods of a distinctive character the property in those other goods would vest in Freudenbergs only as security for any outstanding balance of the price of the relevant parcel of leather. What the draftsman has done is to elide and I think confuse two quite different relationships, that of bailor and bailee, with a superimposed contract of sale (or of vendor and purchaser) on the one hand and that of chargor and chargee on the other hand.

Mr. Littman conceded, and I think he must concede, that if Freudenbergs had no more than a charge on the partly completed and completed handbags the charge was void for non-registration. It was also void as regards the book debts against the bank, which under the debenture had a prior fixed charge (all the invoices on which Freudenbergs rely are dated after January 1980) and as regards the completed or partly completed handbags against the preferential creditors by virtue of section 94 of the Companies Act 1948.

Order accordingly.

Solicitors: David Elton & Wineman; Gamlens for Marc Engel & Co. Northampton.


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