Introduction
Retention of title is a stipulation on a contract of sale that the right of ownership of the goods shall not pass to the buyer until the buyer has paid the seller in full or has discharged all liabilities owing to the seller.
At its simplest, a retention of title clause is a provision in a contract which allows the seller to retain title to goods which it has delivered to a buyer until the buyer has paid for them in full or, where permitted to do so, sold them on to a third party.
Every business which sells or supplies goods should consider using a Retention of Title clause in its terms of business. It can be a valuable aid to a seller where a buyer becomes insolvent and fails to pay for goods delivered.
In Kenya, the sale of goods is governed by the Sale of Goods Act, Cap 31 Laws of Kenya together with the Law of Contract Act Cap 23 Laws of Kenya, which provides for the elements of a contract, rights and obligations of parties in a contract and the possible ways of enforcing their rights under the contract.
Section 39 of the Sale of Goods Act, Cap 31 Laws of Kenya defines the “unpaid seller “as;
The seller of goods is deemed to be an unpaid seller within the meaning of this Act—
(a) when the whole of the price has not been paid or tendered;
(b) when a bill of exchange or other negotiable instrument has been received as conditional payment, and the condition on which it was received has not been fulfilled by reason of the dishonour of the instrument or otherwise.
Part V of the Sale of Goods Act, Cap 31 Laws of Kenya provides for the rights of unpaid seller against the goods.
Where the seller can prove that they are deemed as unpaid seller in accordance with the terms of the Act, the concern would then be what rights can they exercise against their goods and or against the buyer.
Section 40 of the Act provides for the rights of the unpaid seller against the goods which include:
(a) lien on the goods or right to retain them for the price while he is in possession of them;
(b) in case of the insolvency of the buyer, a right of stopping the goods in transitu after he has parted with the possession of them; and
(c) a right of resale as limited by this Act.
Right of Lien or retention of goods
Sections 41 of the Act, gives the unpaid seller who is still in possession of the goods the right of lien (i.e. the right to retain them until payment or tender of price). This means that the retention of title is enforceable under the Kenyan Law.
Right of lien is enforceable under the following circumstances under the Act:
- Where the goods have been sold on credit but the term of credit has expired;
- Where the goods have been sold without any stipulation as to credit; and
- Where the buyer becomes insolvent.
The lien will be lost if the unpaid seller delivers the goods to a carrier or other bailee for transport to the buyer, without reserving the right of disposal of the goods. It will also be lost where the buyer (or his agent) lawfully obtains possession of the goods, or where the unpaid seller waives his rights.
Where part delivery has been made, the unpaid seller has a lien over the rest of the goods, provided that the part delivery already made does not amount to a waiver of the right of lien.
The lien is for the price or for the unpaid balance of price only and not for any accidental expenses, such as storage charges.
Specific Requirements for the Retention of title clause in a contract
Care should be taken to ensure that the drafting of the Retention of Title clause is legally binding and suits the seller’s business. The options available include:
- a “simple” clause which will provide that title in specified goods will only pass once they have been paid for;
- an “all monies” clause which provides that title in goods supplied will only pass once all goods which have been supplied have also been paid for, and
- there are other variations, some of which may not be enforceable at law, for example a clause which seeks to enable a buyer to take the proceeds on sale of goods which have been sold on to a third party before the purchase price has been paid.
In drafting an effective Retention of Title clause, detailed consideration should also be given to:
- the seller’s type of business;
- the nature of the goods; and
- the likely buyers of the goods
The seller should notify the buyer immediately that it intends to exercise Retention of Title rights under the provisions in the contract, and demand a return of the goods. The goods should be inspected and an inventory prepared detailing all the seller’s goods retained by the buyer which are the subject of the Retention of Title claim.
Conclusion
Retention of title is provided for under Kenyan law and as such enforceable in accordance to the circumstances stated above.
For more information or assistance on similar matters, contact us on info@mmsadvocates.co.ke