All monies not watertight in revolving supply contracts

Following a recent case of insolvency in the fashion industry, retention of title clauses may not offer adequate protection to suppliers of goods. Philip Jones explains more.

If your business supplies goods on the basis that they may be sold on before they are paid for, you may not have the protection that you expect from an "all monies" retention of title clause, following a recent case involving insolvency in the fashion industry.

Retaining ownership of goods supplied until they are paid for is critical within many credit control procedures. An "all monies" retention of title clause has been a crucial part of this, ensuring that you retain ownership until payment of all amounts due from the buyer have been received.

A recent case suggests that the effectiveness of these clauses may be open to doubt and if you rely heavily upon such provisions, you should consider if they can be improved, as insolvency practitioners now appear to have a greater prospect of defeating them.

Case notes – Bulbinder Singh Sandhu (trading as Isher Fashions UK) v Jet Star Retail Limited (trading as Mark One) (In Administration).

When Jet Star Retail went into insolvency, the administrators sold an amount of stock, which had been supplied by Mr Sandhu’s business Isher Fashions. Mr Sandhu claimed that the administrators had wrongfully sold the stock and should account to him for its value as the supply contract contained an "all monies" clause.

However, the supply contract also clearly envisaged that Jet Star could sell on the goods provided to it and this was not subject to Jet Star first paying any amounts owed.

Mr Sandhu argued that it should be implied into the sale contract that the ability to resell ended after Jet Star became insolvent, meaning that the sale by the administrators after their appointment was unlawful.

The administrators argued that the contract anticipated the possibility of insolvency and contained provisions dealing with what should happen after Jet Star’s insolvency which did not prevent Jet Star continuing to sell the goods.

The court was not sympathetic to Mr Sandhu’s approach. The contract allowed him to end it after Jet Star became insolvent, but Mr Sandhu had not used those rights before the goods were sold. Even after becoming aware of Jet Star’s administration he did not attempt to end the contract, nor did he demand delivery up of the goods. Instead he claimed their value from the administrators.

If Mr Sandhu had exercised his rights earlier he might have protected his position by stopping further sales of stock but he had chosen not to do so.

The court decided that Jet Star regularly purchased goods from Mr Sandhu to sell on. It did not believe that Jet Star and Mr Sandhu intended that all amounts owed to Jet Star should be paid by Mr Sandhu before the stock was sold on. So, the court decided that the parts of the contract envisaging the sale of the goods by Jet Star overrode the "all monies" clause. This meant that the "all monies" clause was ineffective.

This judgment provides a bonus for insolvency practitioners as it suggests that an "all monies" clause may not be effective where it is used in a revolving supply contract. In such a situation it is envisaged that the buyer will sell the goods on. It will therefore be difficult to convince a court that before selling the goods the buyer must pay all amounts owing to the seller.

The case also emphasises that sellers should consider carefully which rights to use when you become aware of the actual or potential insolvency of one of your buyers.

The message is clear. Great care is needed when considering retention of title clauses, whether (as a supplier) to ensure that you can rely upon them or (as an insolvency practitioner) trying to defeat them.