How to be aware of your rights under a "Romalpa" clause ("reservation of title" clause)
What is a "Romalpa" clause?
The use of "reservation of title" clauses â€“ or, as they are commonly referred to, "Romalpa clauses" â€“ has been widespread in the sale of goods. Under this type of clause, the seller retains ownership of the goods until they are paid for in full, but the buyer is allowed to take delivery of the goods. If the buyer doesn't pay, the seller can therefore take possession of the goods. The Romalpa clause avoids the presumption set down in the SALE OF GOODS ACT 1908 that ownership of the goods passes to the buyer when they are delivered to the buyer.
However, these clauses have no effect unless the buyer acknowledges in writing that the meaning of the clause has been explained to him or her (see below).
Further, the PERSONAL PROPERTY SECURITIES ACT 1999 has significantly reduced the effect and relevance of Romalpa clauses by requiring them to be registered before they will give the seller priority over other creditors with registered security interests in the goods (see below).
When will a Romalpa clause give priority over other creditors?
Before the PERSONAL PROPERTY SECURITIES ACT 1999 (PPSA) came into force in 2002, the benefit of a Romalpa clause to the seller was that if the buyer became insolvent before paying in full, the seller could recover the goods, and did not need to go through the normal procedure to recover the debt. This was because the seller still had ownership of the goods. The seller would therefore have priority over banks and other creditors holding security interests, who would otherwise, if ownership of the goods had passed to the buyer, have prevailed over the unpaid seller's right to the price of the goods. (See How to recover a debt from a bankrupt; for debt recovery not involving bankruptcy, see How to recover a debt from an individual and How to recover a debt from a company).
However, the PPSA has eliminated this advantage of the seller retaining ownership. Under this Act, the seller's interest falls within the broad definition of a "security interest" and must therefore be registered on the Personal Property Securities Register (PPSR) if the seller is to be protected. If the seller does not register their interest, then other creditors of the buyer who subsequently take security interests over the goods and register them will take priority over the seller. For more on the PPSR, see How to register your security interest on the Personal Property Securities Register if you're a creditor and How to check the Personal Property Securities Register for money owed on property offered to you for sale.
The PPSA affects the question of priority between the seller and the buyer's other creditors. But as between the buyer and seller, a Romalpa clause will continue to have effect, entitling the seller to possession of the goods if they are not paid for in full, regardless of whether the seller's interest is registered on the PPSR.
Buyers must be advised of the effect of the Romalpa clause
The CONSUMER GUARANTEES ACT 1993 gives buyers some protection against Romalpa clauses. The Act provides that for the clause to take effect, the following two conditions must be satisfied:
- The buyer must have received oral advice, acknowledged by the buyer in writing, of the way in which his or her right to undisturbed possession of the goods is affected by the Romalpa clause. This oral advice must be sufficient to enable a reasonable consumer to understand the general nature and effect of the clause.
- The buyer must also have received a written copy of the agreement for supply, or of the part of the agreement that contains the Romalpa clause.
Other clauses that may protect the seller
In addition to a simple Romalpa clause, you as a seller may also include provisions so that you are entitled to any proceeds if the buyer sells the goods to somebody else, or manufactures new goods out of the original goods.
- Care is required both in drafting the Romalpa clause and in ensuring that the requirements of the Consumer Guarantees Act are complied with. You should therefore obtain the advice of a lawyer both for the drafting of the clause and also before you take any action to recover the goods under the clause.
- The effect of a Romalpa clause may be complicated by the goods in question being attached to real property (for example, if the goods are the joinery for a house). You should obtain legal advice in those cases.