Romalpa clauses are commonplace in standard trading terms and sale of goods contracts following the long-established case of Romalpa (1976). They are designed to protect a seller who is unable to obtain payment for goods that have been delivered to a buyer. The buyer is in possession of the goods but the title to those rests with the seller under a clause of this type.
These clauses are often turned to when the buyer becomes insolvent as the provision survives insolvency. Without such a clause, title to the goods passes to the buyer under the Sale of Goods Act 1979 (as amended), leaving the seller an unsecured creditor of the buyer.
Extended form of clause
The clause can be drafted so that it covers all monies owed by the buyer to the seller, not just those in respect of any particular goods. If the goods have been mixed or combined with others whilst in the buyer’s possession, it is usually necessary to consider whether they can be separated in order to claim the benefit of the clause
A provision can be included whereby, if the buyer sells on the goods to a third party, the seller can lay claim to the proceeds or even the final product of the manufacturing process. However, the Courts have proved hostile towards these wider clauses. If the clause amounts to a charge over company property it must be registered at Companies House otherwise it will be void.
Importance of incorporation
Regardless of whether the clause is simple or in extended form, unless it is incorporated in the contract between the buyer and the seller it will be unenforceable. This means the seller’s trading terms must have been communicated to the buyer before the contract is made. If the first time the buyer sees the Terms of Business is on the back of an invoice, it is too late.
Quite clearly, upon a buyer’s insolvency, a supplier must act quickly to ensure their goods are identified and marked as such. This is a complex area of law and it is important to ensure that contractual terms are clear.
Disclaimer: While we do all that is possible in terms of ensuring its accuracy, this blog contains general information only. Nothing in these pages constitutes legal advice. You need to consult a suitably qualified lawyer from the firm on any specific legal problem or matter.