CASEBOOK: TITLE DISPUTES

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.

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The Court of Appeal held that there is no inconsistency between
a simple retention of title clause and an implied, 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 finance 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 a signing of the trust receipt 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.

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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 converted 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 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 while in Dimond’s possession and
thereafter its interest was in the proceeds of sale. 

 The author is director in Wragge & Co LLP’s
Recoveries & Finance team