Along came a spider...

7.33 (EN)

Court of Appeal, 10 July 1979
BORDEN (U.K.) LTD. v SCOTTISH TIMBER PRODUCTS LTD. AND ANOTHER

Specification and reservation of title
Chipboard


Original language version (source reference: cf. casebook)


BRIDGE L.J.

This is an appeal from a judgment of Judge Rubin, sitting as a judge of the Chancery Division, given on November 15, 1978, on the trial of certain preliminary issues of law pursuant to an order of Master Cholmondeley Clarke made on July 6, 1978. We have heard arguments on the essential points of the appeal at some length, that is no criticism whatever of counsel, as the arguments have been extremely helpful, but, in my judgment, the points that we have to decide are, in the end, really rather short ones and I hope it will not be thought that I am in any way being discourteous to counsel if I endeavour to deal with them shortly in this judgment.

For the purpose of the preliminary issues of law which were ordered to be tried, certain facts were agreed between the parties; so far as material to the only points remaining for decision by this court, the agreed facts can be very shortly stated.

The plaintiff company, Borden (U.K.) Ltd., are the manufacturers of a product called urea-formaldehyde chipboard resin. Over a period of some four years up to September 1977, they were the main, but not the exclusive, suppliers of that product to the defendant company, Scottish Timber Products Ltd., for use by the defendants in the manufacture of chipboard. The defendants had a storage capacity for the resin which they needed, which was only sufficient at most to keep them supplied for two days' production in their factory. Accordingly, when their factory was working in the ordinary way it was inevitable that the resin supply would be used in the manufacture within two days of delivery. This circumstance was well known to the plaintiffs and it is really essential to the main issue arising in this appeal that one should infer from those circumstances that the contract clearly permitted the use of the resin in the manufacturing process before it had been paid for, the resin being sold on credit terms.

In the course of the manufacturing process the resin was mixed with certain hardeners and wax emulsion, to form something which is referred to as a "glue mix"; this process of mixture was essentially irreversible in the sense that, once mixed, the resin as such could no longer be recovered. The glue mix was then blended with various grades of wood chippings and finally pressed together to form the end product, the chipboard.

On September 16, 1977, a receiver and manager of the defendant company's undertaking was appointed by debenture holders; the receiver is the second defendant in the proceedings. The defendant company has subsequently gone into compulsory liquidation pursuant to an order made on June 25, 1979, and is now continuing to defend this action by leave of the Official Receiver as provisional liquidator.

The plaintiffs claim that as at September 16, 1977, when the receiver was appointed, the sum of £318,321.27 net was due to them from the defendants for resin supplied since June 1, 1977. They further claim that since February 14, 1977, all sales of resin to the defendants have been made pursuant to an express contractual condition in the following terms:

"... (2) Risk and Property. Goods supplied by the company shall be at the purchaser's risk immediately on delivery to the purchaser or into custody on the purchaser's behalf (whichever is the sooner) and the purchaser should therefore be insured accordingly. Property in goods supplied hereunder will pass to the customer when: (a) the goods the subject of this contract; and (b) all other goods the subject of any other contract between the company and the customer which, at the time of payment of the full price of the goods sold under this contract, have been delivered to the customer but not paid for in full, have been paid for in full." There is an issue on the pleadings as to whether that was indeed an effective term of the contract between the parties.

It is further pleaded by the plaintiffs in their statement of claim, reading only so much as is relevant to the issues which we now have to decide:

"In the premises ... any chipboard ... manufactured or fabricated with any of the said resin" - that is, the plaintiffs' resin - "... is charged to the [extent that it consists of any of the said resin] with payment to the plaintiff of £318,321.27. Further or alternatively, all moneys and other property representing the ... chipboard ... or any of the proceeds of sale or other disposal thereof are charged to the extent that they represent the said resin with the payment to the plaintiff of £318,321.27." In the relief claimed in the statement of claim appropriate declarations are claimed, pursuant to those pleaded rights.

Master Cholmondeley Clarke's order required the decision of the following points of law, namely:

"(a) Whether upon the facts pleaded in the amended statement of claim the condition pleaded in paragraph 5 thereof" - that is the alleged condition 2 of the contract - "has the result in law: ... (ii) that any chipboard ... is charged to the [extent that it consists of any of the said resin] with the payment to the plaintiff of £318,321.27; and/or (iii) that all moneys and other property representing any of the said ... chipboard ... or any of the proceeds of sale or other disposal thereof are charged to the extent that they represent the said resin with the payment to the plaintiff of £318,321.27. (b) Whether any charge resulting from such condition was and is void by reason of section 95 of the Companies Act 1948. ..."

I should say that there was a further plea included in the plaintiffs' statement of claim to be entitled to the ownership, in part, of the chipboard. That also was the subject of one of the questions of law raised as a preliminary issue; that was decided by the judge against the plaintiffs and no cross-appeal was raised with regard to that, so we may take it that it is not in dispute that the title to the manufactured chipboard is the title of the defendants.

The judge answered questions (a) (ii) and (iii) affirmatively, in favour of the plaintiffs, and question (b) negatively, also in favour of the plaintiffs. The material part of his order is:

"This court doth declare that the plaintiffs are entitled to trace any of their resin supplied after February 14, 1977, the title to which had not passed to the defendants, Scottish Timber Products Ltd., under clause 2 of the plaintiffs' standard conditions in the pleadings mentioned into any chipboard manufactured from such resin or into the proceeds of sale of such chipboard but so that the plaintiffs cannot recover a sum in excess of the contract price of such resin. and this court doth declare that the exercise of such a tracing remedy is not a charge created by the company to which section 95 of the Companies Act 1948 has any application."

It is common ground, I think, that that form of order, which purports to declare finally the rights of the parties, would in any event require some modification, since what the judge was called upon to do was to decide preliminary issues of law upon certain assumptions of fact which had not yet been proved; but nothing turns upon that.

The essence of the judge's reasoning in arriving at the conclusion that the plaintiffs were entitled to a tracing remedy, which was the first issue for consideration, is stated in a few sentences of the judgment. The judge said:

"It seemed to me clear from an early stage in the argument that the defendants received resin which remained the property of the plaintiffs as a bailee for the plaintiffs and accordingly a fiduciary relationship was created. ... The defendants argued that the tracing remedy does not extend where there is a use in manufacture to the manufactured product and its proceeds of sale. In my judgment unless the fiduciary relationship was brought to an end by the use in manufacture, or it is possible to imply a further term into the contract that the defendants would be entitled to deal with the chipboard on its own account, there is no reason why the tracing remedy should not extend both to the chipboard and its proceeds of sale."

In my judgment, the first question which arises for our decision is whether there was a fiduciary relationship here between the defendants and the plaintiffs in the nature of the relationship of bailee and bailor. As I have already said, it is common ground that the defendants were at liberty to use the resin which had not been paid for in the manufacture of chipboard, so that before the resin was paid for, the result was that it ceased to exist as such. Is that consistent with the relationship of the parties being that of bailor and bailee?

The judge, in deciding that question, did not, I think, have the advantage, as we have had, of being referred to the decision of the Privy Council in South Australian Insurance Co. v. Randell (1869) L.R. 3 P.C. 101, where Sir Joseph Napier, giving the advice of the Board, said, at pp. 108-109:

"A bailment on trust implies, that there is reserved to the bailor the right to claim a redelivery of the property deposited in bailment. ... The law seems to be concisely and accurately stated by Sir William Jones in the passages cited by Mr. Mellish from his treatise on Bailments, 3rd ed., pp. 64 and 102. Wherever there is a delivery of property on a contract for an equivalent in money or some other valuable commodity, and not for the return of his identical subject matter in its original or an altered form, this is a transfer of property for value - it is a sale and not a bailment. Chancellor Kent in his Commentaries, 11th ed., vol. 2, p. 781, where he refers to the case of Seymour v. Brown, 19 Johns.Rep. 44, of which he disapproved in common with Story J., adopts the test, whether the identical subject matter was to be restored either as it stood or in an altered form; or whether a different thing was to be given for it as an equivalent; for in the latter case it was a sale, and not a bailment. This is the true and settled doctrine according to his opinion."

I can well appreciate that in the present circumstances, if the defendants repudiated the contract, or became insolvent, before the resin had been paid for, they might then have become a bailee of any resin which at that time remained unused. But so long as the business transacted between these parties continued in the ordinary way and resin was delivered for use in the manufacturing process at a time before it could have been paid for, in circumstances in which the plaintiffs clearly had no right to call for its return or to object to its use in the manufacture of chipboard, and where it was never intended that the resin should be recovered, either in its original or in its altered form or at all, it seems to me quite impossible to say that this was a contract of bailment. The contract was essentially one of sale and purchase, subject only to the reservation of title clause, whatever its effect may have been.

Now what was the effect of that clause? Looked at in principle, and independently of authority, I find it difficult to see how the clause was apt to create any fiduciary relationship. I am much attracted by the view which was canvassed in argument that the effect of condition 2 was such that the beneficial interest in the resin passed to the defendants, who were to be entirely free to use it for their own purposes in the manufacture of chipboard, and that all that was retained by the plaintiffs was the bare legal title to the resin so long as the resin existed, held as security for the unpaid price of that resin and of any other resin which the plaintiffs had supplied. But I am quite content to assume that this is wrong and to suppose that up to the moment when the resin was used in manufacture it was held by the defendants in trust for the plaintiffs in the same sense in which a bailee or a factor or an agent holds goods in trust for his bailor or his principal. If that was the position, then there is no doubt that as soon as the resin was used in the manufacturing process it ceased to exist as resin, and accordingly the title to the resin simply disappeared. So much is accepted by Mr. Mowbray for the plaintiffs.

The contract contains no express stipulation conferring on the plaintiffs any rights over the chipboard and Mr. Mowbray has repeatedly disclaimed any intention to argue for an implied term in the contract that any rights over the chipboard should be conferred on them. He, nevertheless, argues that the tracing remedy arises from the mixture of the plaintiffs' resin with the defendants' other materials in the manufacture of chipboard, so that an appropriate proportion of the chipboard now represents the plaintiffs' security for moneys due to them as the unpaid price of all the resin delivered. In my judgment, the crux of the whole case is whether this argument can be sustained.

It is conceded that there is no previous authority which establishes that the tracing remedy can be exercised where there has been an admixture of the goods of A with the goods of B in such a way that they both lose their identity and result in the production of goods of an entirely different kind; but it is urged that the availability of such a remedy is supported by the application by analogy of principles derived from the decided cases.

The main authority relied on by the judge in reaching his conclusion. and by Mr. Mowbray in his argument for the plaintiffs, is the decision of this court in Aluminium Industrie Vaassen B.V. v. Romalpa Aluminium Ltd. [1976] 1 W.L.R. 676. The plaintiffs in that case sold aluminium foil to the defendants. The defendants went into liquidation, owing the plaintiffs over £122,000 and the receiver certified that £35,152 was held in an account in his name with the defendants' bankers, representing the proceeds of sale of aluminium foil supplied to the plaintiffs, which the defendants had sold to third parties. The plaintiffs, who had a reservation of title clause in their conditions of sale, claimed to be entitled to trace the aluminium foil into the proceeds of sale, and that claim was upheld by Mocatta J. at first instance and by this court on appeal. The particular condition of the contract which applied is set out in the judgment of Mocatta J., at p. 679:

"'The ownership of the material to be delivered by A.I.V.' (that is the plaintiffs) 'will only be transferred to purchaser when he has met all that is owing to A.I.V., no matter on what grounds. ... Until the date of payment, purchaser. if A.I.V. so desires, is required to store this material in such a way that it is clearly the property of A.I.V. A.I.V. and purchaser agree that, if purchaser should make (a) new object(s) from the material, mix this material with (an)other object(s) or if this material in any way whatsoever becomes a constitutent of (an)other object(s) A.I.V. will be given the ownership of this (these) new object(s) as surety of the full payment of what purchaser owes A.I.V. To this end A.I.V. and purchaser now agree that the ownership of the article(s) in question, whether finished or not, are to be transferred to A.I.V. and that this transfer of ownership will be considered to have taken place through and at the moment of the single operation or event by which the material is converted into (a) new object(s), or is mixed with or becomes a constituent of (an)other object(s). Until the moment of full payment of what purchaser owes A.I.V. purchaser shall keep the object(s) in question for A.I.V. in his capacity of fiduciary owner and, if required, shall store this (these) object(s) in such a way that it (they) can be recognised as such. Nevertheless, purchaser will be entitled to sell these objects to a third party within the framework of the normal carrying on of his business and to deliver them on condition that - if A.I.V. so requires - purchaser, as long as he has not fully discharged his debt to A.I.V. shall hand over to A.I.V. the claims he has against his buyer emanating from this transaction.'" The condition is expressed in very curious language because it is a translation from the Dutch, which was the original language of the contract. Mocatta J. held that that clause showed an intention to create a fiduciary relationship between the parties and that the plaintiffs were entitled to follow the proceeds of the sub-sales; he reached that conclusion in the application of the principles of the decision in In re Hallett's Estate (1880) 13 Ch.D. 696.

In the Court of Appeal the essence of the reasoning of their Lordships can be collected from some quite short passages, first, from the leading judgment of Roskill L.J. where he says [1976] 1 W.L.R. 676, 689-690:

"Now, the crucial facts to my mind are two: first, that the defendants were selling goods which the plaintiffs owned at all material times; and secondly, that clause 13 as a whole is obviously designed to protect the plaintiffs, in the event of later insolvency, against the consequences of having parted with possession of, though not with legal title to, these goods before payment was received, 75 days' credit being allowed. When, therefore, one is considering what, if any, additional implication has to be made to the undoubted implied power of sale in the first part of clause 13, one must ask what, if any, additional implication is necessary to make effective the obvious purpose of giving the requisite security to the plaintiffs? One is, I think, entitled to look at the second part of clause 13 to answer this; for it would be strange if the first part were to afford no relevant security when the second part is (as I think) elaborately drawn to give such security in relation to manufactured or mixed goods.

"I see no difficulty in the contractual concept that, as between the defendants and their sub-purchasers, the defendants sold as principals, but that, as between themselves and the plaintiffs, those goods which they were selling as principals within their implied authority from the plaintiffs were the plaintiffs' goods which they were selling as agents for the plaintiffs to whom they remained fully accountable. If an agent lawfully sells his principal's goods, he stands in a fiduciary relationship to his principal and remains accountable to his principal for those goods and their proceeds. A bailee is in like position in relation to his bailor's goods. What, then, is there here to relieve the defendants from their obligation to account to the plaintiffs for those goods of the plaintiffs which they lawfully sell to sub-purchasers?" Then, Roskill L.J., a little later, said, at p. 690:

"It seems to me clear ... that to give effect to what I regard as the obvious purpose of clause 13 one must imply into the first part of the clause not only the power to sell but also the obligation to account in accordance with the normal fiduciary relationship of principal and agent, bailor and bailee. Accordingly, like the judge I find no difficulty in holding that the principles in Hallett's case, 13 Ch.D. 696 are of immediate application, and I think that the plaintiffs are entitled to trace these proceeds of sale and to recover them, as Mocatta J. has held by his judgment." Goff L.J. said, at p. 691:

"In my judgment the second part of the case comes down to a short question of construction. It is common ground that a power of sale during the period that any money remains owing to the plaintiffs must be implied; but the question is upon what terms." Then, at the end of his judgment, Goff L.J. said, at p. 693:

"In short, my conclusion is that the power of sale to be implied where none has been expressed must be so qualified as not to defeat the intention clearly shown by clause 13 as a whole, including the latter part, which only emphasises this. It follows that there was, as Roskill L.J. says, a sufficient fiduciary relationship between the parties, and this is indeed expressly contemplated in the reference to a fiduciary owner in the second part of clause 13. The implied power must, therefore, in my judgment be a power to sell, not for the defendants' own account, but for the account of the plaintiffs unless and until all moneys owing be paid." Megaw L.J., still more succinctly, said, at p. 694:

"The power of sale to be implied in the first part of clause 13, where none has been expressed, must be such as not to defeat the intention shown by clause 13. It is not a power to sell for the defendants' own account, but it is a power to sell for the account of the plaintiffs."

It seems to me that there are certain very clear distinctions between that case and this. First, it was conceded throughout in that case that the defendants were bailees of the aluminium foil for the plaintiffs; secondly, on the facts on which the decision turns there had been no admixture of the foil with any other material; if there had been, it would have been covered by the express terms of the second part of condition 13, but all that was in issue was a claim to trace the foil into the proceeds of sale of the foil. Thirdly, the case turned on the construction of the particular clause and on what was to be implied in the first part of the clause as to the terms on which the defendants were entitled to sell aluminium foil. Here, by contrast, first, as I have said, in my judgment there clearly was no bailment of the resin; secondly, there was an admixture of the goods of the plaintiffs with other materials of the defendants, producing a wholly new substance. Thirdly, we are not here concerned with any sale of the resin; it is not suggested by either party that the terms of sale here contemplated that the defendants should be at liberty to sell the resin as such; all that was contemplated was that they should be a liberty to use it in their own process of manufacture.

But to my mind the most important distinction is that the essence of the decision in Romalpa was that on the facts found or admitted Romalpa were selling the plaintiffs' material, the aluminium foil, as agents for the plaintiffs. It seems to me quite impossible to say here that in using the plaintiffs' resin in their own manufacturing process to manufacture their own chipboard, the defendants could possibly be described as acting in any sense as agents for the plaintiffs. I do not in any way question the correctness of the decision in Romalpa, but for my own part I really do not find that it throws any significant light on the questions which we have to decide.

The only argument derived from the consideration of Romalpawhich is worthy of attention is that it is said here, as it was said in Romalpa, that the intention of the clause under consideration must have been to give the plaintiffs an effective security as unpaid purchaser for the purchase price of any resin, and their security would not be effective unless the tracing remedy claimed on behalf of the plaintiffs is an effective remedy. For my part, I am wholly unimpressed by that argument. I accept that in stipulating for condition 2 in their conditions of sale, it was a pious hope on the part of the plaintiffs that they were creating for themselves an effective security for the payment of any unpaid purchase price due to them at any time; but the mere fact that they hoped that that would be so and intended that it should be so, is quite insufficient to carry the day if the language they used in relation to the agreed facts and the legal relationship which they created, whatever it may have been, is insufficient to make their intention an effective one.

I come to what, to my mind, is really the heart of the matter: Can the tracing remedy here claimed be supported in the application, by analogy, of the well-known principles of tracing expounded so clearly in the judgment of Sir George Jessel M.R. in In re Hallett's Estate, 13 Ch.D. 696, 708-711? He says:

"The modern doctrine of equity as regards property disposed of by persons in a fiduciary position is a very clear and well-established doctrine. You can, if the sale was rightful, take the proceeds of the sale, if you can identify them. If the sale was wrongful, you can still take the proceeds of the sale, in a sense adopting the sale for the purpose of taking the proceeds, if you can identify them. There is no distinction, therefore, between a rightful and a wrongful disposition of the property, so far as regards the right of the beneficial owner to follow the proceeds. But it very often happens that you cannot identify the proceeds. The proceeds may have been invested together with money belonging to the person in a fiduciary position, in a purchase. He may have bought land with it, for instance, or he may have bought chattels with it. Now, what is the position of the beneficial owner as regards such purchases? I will, first of all, take his position when the purchase is clearly made with what I will call, for shortness, the trust money, although it is not confined, as I will show presently, to express trusts. In that case, according to the now well-established doctrine of equity, the beneficial owner has a right to elect either to take the property purchased, or to hold it as a security for the amount of the trust money laid out in the purchase; or, as we generally express it, he is entitled at his election either to take the property, or to have a charge on the property for the amount of the trust money. But in the second case, where a trustee has mixed the money with his own, there is this distinction, that the cestui que trust, or beneficial owner, can no longer elect to take the property, because it is no longer bought with the trust-money simply and purely, but with a mixed fund. He is, however, still entitled to a charge on the property purchased, for the amount of the trust-money laid out in the purchase; and that charge is quite independent of the fact of the amount laid out by the trustee. The moment you get a substantial portion of it furnished by the trustee, using the word 'trustee' in the sense I have mentioned. as including all persons in a fiduciary relation, the right to the charge follows. That is the modern doctrine of equity. Has it ever been suggested, until very recently, that there is any distinction between an express trustee, or an agent, or a bailee, or a collector of rents, or anybody else in a fiduciary position? I have never heard, until quite recently, such a distinction suggested. It cannot, as far as I am aware (and since this court sat last to hear this case, I have taken the trouble to look for authority), be found in any reported case even suggested, except in the recent decision of Fry J., to which I shall draw attention presently. It can have no foundation in principle, because the beneficial ownership is the same, wherever the legal ownership may be. If you have goods bargained and sold to a man upon trust to sell and hand over the net proceeds to another, that other is the beneficial owner; but if instead of being bargained and sold, so as to vest the legal ownership in the trustee, they are deposited with him to sell as agent, so that the legal ownership remains in the beneficial owner, can it be supposed, in a Court of Equity, that the rights of the beneficial owner are different, he being entire beneficial owner in both cases? I say on principle it is impossible to imagine there can be any difference. In practice we know there is no difference, because the moment you get into a Court of Equity, where a principal can sue an agent as well as a cestui que trust can sue a trustee, no such distinction was ever suggested, as far as I am aware. Therefore, the moment you establish the fiduciary relation, the modern rules of equity, as regards following trust money, apply. ...

"Now that being the established doctrine of equity on this point, I will take the case of the pure bailee. If the bailee sells the goods bailed, the bailor can in equity follow the proceeds, and can follow the proceeds wherever they can be distinguished, either being actually kept separate, or being mixed up with other moneys. I have only to advert to one other point, and that is this - supposing, instead of being invested in the purchase of land or goods, the moneys were simply mixed with other moneys of the trustee, using the term again in its full sense as including every person in a fiduciary relation, does it make any difference according to the modern doctrine of equity? I say none. It would be very remarkable if it were to do so. Supposing the trust money was 1,000 sovereigns, and the trustee put a them into a bag, and by mistake, or accident, or otherwise, dropped a sovereign of his own into the bag. Could anybody suppose that a judge in equity would find any difficulty in saying that the cestui que trust has a right to take 1,000 sovereigns out of that bag? I do not like to call it a charge of 1,000 sovereigns on the 1,001 sovereigns, but that is the effect of it. I have no doubt of it. It would make no difference if, instead of one sovereign, it was another 1,000 sovereigns; but if instead of putting it into his bag, or after putting it into his bag, he carries the bag to his bankers, what then? According to law, the bankers are his debtors for the total amount; but if you lend the trust money to a third person, you can follow it."

What are the salient features of the doctrine that Sir George Jessel M.R. there expounds? First, it will be observed that in all cases the party entitled to trace is referred to as the beneficial owner of the property, be it money or goods, which the "trustee," in the broad sense in which Sir George Jessel M.R. uses that word, including all fiduciary relationships, has disposed of. In the instant case, even if I assume that so long as the resin remained resin the beneficial ownership of the resin remained in the plaintiffs, I do not see how the concept of the beneficial ownership remaining in the plaintiffs after use in manufacture can here possibly be reconciled with the liberty which the plaintiffs gave to the defendants to use that resin in the manufacturing process for the defendants' benefit, producing their own chipboard and in the process destroying the very existence of the resin.

Secondly, the doctrine expounded by Sir George Jessel M.R. contemplates the tracing of goods into money and money into goods. In the latter case it matters not that the moneys represent a mixed fund of which a part only is impressed with the relevant trust. The cestui que trust has a charge on the mixed fund or the property into which it has passed for the amount of the trust moneys. It is at the heart of Mr. Mowbray's argument to submit that the same applies to a mixture of goods with goods, relying in particular on Sir George Jessel M.R.'s illustration of the mixed bag of sovereigns. Now I can well see the force of that argument if the goods mixed are all of a homogenous character. Supposing I deposit a ton of my corn with a corn factor as bailee, who does not store it separately but mixes it with corn of his own. This, I apprehend, would leave unaffected my rights as bailor, including the right to trace. But a mixture of heterogeneous goods in a manufacturing process wherein the original goods lose their character and what emerges is a wholly new product, is in my judgment something entirely different.

Some extreme examples were canvassed in argument. Suppose cattle cake is sold to a farmer, or fuel to a steel manufacturer, in each case with a reservation of title clause, but on terms which permit the farmer to feed the cattle cake to his herd and the steelmaker to fuel his furnaces, before paying the purchase price. Mr. Mowbray concedes that in these cases the seller cannot trace into the cattle or the steel. He says that the difference is that the goods have been consumed. But once this concession is made, I find it impossible to draw an intelligible line of distinction in principle which would give the plaintiffs a right to trace the resin into the chipboard in the instant case. What has happened in the manufacturing process is much more akin to the process of consumption than to any simple process of admixture of goods. To put the point in another way, if the contribution that the resin has made to the chipboard gives rise to a tracing remedy, I find it difficult to see any good reason why, in the steelmaking example, the essential contribution made by the fuel to the steel manufacturing process should not do likewise.

These are the principal considerations which have led me to the conclusion that the plaintiffs are not entitled to the tracing remedy which they claim. But I am fortified in that conclusion by the further consideration that if the remedy were available in such cases, a most intractable problem could, and in many cases would, arise in quantifying the proportion of the value of the manufactured product which the tracer could claim as properly attributable to his ingredient. In the instant case, a breakdown of the actual costings of chipboard over a period of seven months to July 29, 1977, has been agreed, attributing 17 per cent. of the total cost to the cost of resin, subject to a reservation with respect to wastage and over-usage. But one can well see that in many cases where the cost of materials and labour involved in a particular production process were constantly fluctuating, it might be quite impossible to assign a proportion of the total cost properly attributable to one particular ingredient with any certainty at all.


The lesson to be learned from these conclusions is a simple one. If a seller of goods to a manufacturer, who knows that his goods are to be used in the manufacturing process before they are paid for, wishes to reserve to himself an effective security for the payment of the price, he cannot rely on a simple reservation of title clause such as that relied upon by the plaintiffs. If he wishes to acquire rights over the finished product, he can only do so by express contractual stipulation. We have seen an elaborate, and presumably effective, example of such a stipulation in Aluminium Industrie Vaassen B.V. v. Romalpa Aluminium Ltd. [1976] 1 W.L.R. 676. An attempt to acquire rights over the finished product by a stipulation which proved ineffective for want of registration under section 95 of the Companies Act 1948 is to be seen in the decision of Slade J. in In re Bond Worth Ltd. [1980] Ch. 228to which in the course of argument we were helpfully referred.

For the reasons that I have attempted to explain, I would allow this appeal and set aside the judge's order. I would answer questions (a) (ii) and (iii) set out in Master Cholmondeley Clarke's order in the negative; in the light of those answers, in my judgment, question (b), as to the effect of section 95, does not arise, and I would express no opinion about it.

TEMPLEMAN L.J.

Unsecured creditors rank after preferential creditors, mortgagees and the holders of floating charges and they receive a raw deal: see Business Computers Ltd. v. Anglo-African Leasing Ltd. [1977] 1 W.L.R. 578, 580. It is not therefore surprising that this court looked with sympathy on an invention designed to provide some protection for one class of unsecured creditors, namely unpaid sellers of goods: see Aluminium Industrie Vaassen B.V. v. Romalpa Aluminium Ltd. [1976] 1 W.L.R. 676, although there is no logical reason why this class of creditor should be favoured as against other creditors such as the suppliers of consumables and services.

The present appeal seeks to extend the Romalpacase by combining an idea culled from the Dutch Civil Law (see the Romalpacase, at p. 684) and the English principles of equity, so as to produce a new super equitable trace, having the same effect as a charge, but superior to a charge, in that it is immune from the requirements of registration.

For the purposes of this appeal, it must be assumed that the plaintiff sellers, Borden (U.K.) Ltd., from time to time sold and delivered to the defendant buyers, Scottish Timber Products Ltd., quantities of resin subject to a retention of title condition, which provided that the "property in goods supplied" would only pass to the defendants when payment in full had been made for the goods supplied and for all other goods supplied before the date of such payment in full. There was nothing in any contract between the plaintiffs and the defendants which precluded the defendants from using the resin immediately after delivery and before any payment. The defendants incorporated the resin supplied in the manufacture of chipboard. The resin became an inseparable component, or ingredient, of the chipboard. The property in the chipboard vested in the defendants. There was nothing in any contract which precluded the defendants from selling that chipboard, receiving the purchase price and employing the proceeds of sale in their business.

The plaintiffs claim that the retention of title condition operated on each supply of resin after February 14, 1977, and that the defendants owe the plaintiffs £318,321.27 for resin sold and delivered by various contracts incorporating the retention of title condition after June 1, 1977. The plaintiffs plead that all chipboard manufactured with resin wholly or partly supplied by them since February 14, 1977, to the extent that the chipboard consists of their resin, is charged with payment to them of £318,321.27. The plaintiffs plead that all proceeds of sale of chipboard and all property representing proceeds of sale of chipboard to the extent that the proceeds of sale represent, or are attributable to, resin supplied by them, are likewise charged with payment to them of that sum. The defendants are insolvent; a receiver has been appointed and a compulsory winding up order has been made. The defendants, it is pleaded, were under a fiduciary duty to keep separate from their other assets a proper proportion, estimated to be 12 per cent., of the proceeds of sale of chipboard. Apart from the uncertainties involved in this casual estimate, the plaintiffs accept that the defendants used and mixed resin other than the plaintiffs' resin in the manufacture of their chipboard.

No one knows at this stage whether the price of resin fluctuated from time to time, or whether the other ingredients, costs of labour, overheads and profit margins involved in the manufacture and sale of chipboard, fluctuated to a corresponding degree. No one knows how the defendants, going about their business, no doubt blissfully unconscious of any fiduciary duty, employed the proceeds of sale of chipboard. They may have paid part to discharge their debt to the plaintiffs; they may have paid the money into their bank in reduction of an overdraft; they may have paid their taxes; they may have bought and consumed other goods and paid other creditors. No one knows whether the proceeds of sale of chipboard could now be traced with any degree of certainty and what the results would be.

The plaintiffs seek to surmount these difficulties by an inquiry of what has become of the resin and of what property now represents resin. They seek to simplify matters in their own favour by an injunction which would place the defendants' receiver in danger of committal to prison, unless, to be safe, he set aside the arbitrary proportion of 12 per cent. of everything the defendants received and everything which he receives which may, by any stretch of imagination, be derived directly or indirectly from the defendants' chipboard, at any rate until he has amassed the sum of£318,321. At some distant date, when the court has unearthed the unearthable, traced the untraceable and calculated the incalculable, there will emerge the sum which it is said belongs to the plaintiffs in equity, a sum which is immune from the claims of Crown and mortgagee, debenture holder and creditor, a sum secured to the plaintiffs by a simple retention of title clause, which referred only to resin but was pregnant with all the consequences alleged in the statement of claim and hidden from the gaze of all other persons who dealt with the defendants.

On behalf of the plaintiffs it was submitted that the retention of title condition, which reserved to the plaintiffs the property in the resin, imposed on the defendants fiduciary duties and enables the plaintiffs to trace the resin through all its transformations. In my judgment, when resin was sold and delivered the property in the resin could be retained by the plaintiffs, and was retained only as security for the payment of the purchase price and other debts incurred, and to be incurred, by the defendants to the plaintiffs in respect of supplies of resin. If the defendants repudiated one contract the plaintiffs could accept that repudiation and recover possession of the resin. If the plaintiffs did not accept repudiation, or if the defendants failed to make payment due under any other contract, the plaintiffs could enforce their security by selling the resin, for which purpose they had reserved the title to themselves. When resin was sold and delivered, the defendants admittedly took possession subject to the title and rights of the plaintiffs; but the defendants did not receive the resin in any fiduciary capacity, but for themselves as purchasers. They could not sell and make title to the resin, because the title had been retained by the plaintiffs. But the defendants were free to employ the resin in the manufacture of chipboard.

When the resin was incorporated in the chipboard, the resin ceased to exist, the plaintiffs' title to the resin became meaningless and their security vanished. There was no provision in the contract for the defendants to provide substituted or additional security. The chipboard belonged to the defendants.

We were not invited to imply in the contract between the plaintiffs and the defendants an agreement by the defendants to furnish substituted security in the form of an interest in the chipboard; we were invited to allow the plaintiffs to trace their vanished resin to the chipboard and thence to the proceeds of sale of chipboard and property representing those proceeds of sale. I agree that in a commercial contract of this nature no agreement should be implied for the furnishing of additional security. In the absence of any implied or express agreement to provide substitutional security, equity has nothing to trace; the resin and the title and the security disappeared without trace. I am in any event unwilling to imply a term or invoke the aid of equity to produce a result which other creditors of the defendants might justifiably regard as a fraudulent preference.

For good measure, it seems to me that if the plaintiffs have any interest or share in chipboard or proceeds of sale of chipboard, or property representing proceeds of sale of chipboard, they fall foul of section 95 of the Companies Act 1948. Any such interest or share must have been agreed to be granted by the defendants when they bought and accepted delivery of resin on the terms of the retention of title condition. Any such interest or share must have been created by the defendants when they employed the resin in the manufacture of chipboard., Any such interest or share must have been agreed to be granted and must have been created as security and only as security for the payment of the debts incurred and to be incurred by the defendants to the plaintiffs in respect of the supply of resin. Those debts were charged on the interest or share granted and created by the defendants. If tracing is permissible, the charge attached to the chipboard, when chipboard was manufactured, then attached to the proceeds of sale when the chipboard was sold, and finally attached to any property representing those proceeds of sale of chipboard. If the defendants created a charge on chipboard, such a charge is void against the liquidator and creditors of the defendants under section 95, which makes void against the company or its creditors an unregistered charge created or evidenced by an instrument which, if executed by an individual, would require registration as a bill of sale. If the interest floated from the chipboard to proceeds of sale and onwards, so floated the charge, and section 95 makes void any unregistered floating charge on the undertaking or property of the company.

It was said that a floating charge of this nature has not so far been comprised in any authority on section 95; the fact that this is the first authority does not seem to me to be any drawback.

We were much pressed with the Romalpa case [1976] 1 W.L.R. 676, in which buyers were entitled to sell goods supplied by unpaid sellers, but only as agents for the sellers, who retained the property in the goods pending payment. On the construction of a contract described by Roskill L.J., in refusing leave to appeal to the House of Lords, as "a rather simple contract, not altogether happily expressed in the English language, but (which) could not govern any other case," the court implied an obligation on the buyers to account as bailees and held that the sellers were entitled to trace the proceeds of sale. Section 95 was not argued; it does not appear whether the buyers were in liquidation, and in any event the argument was probably not put forward because the retention of title in the sellers' goods was thought not to be the creation of a charge by the buyers. In the present case the defendants did not manufacture or sell chipboard, or perform any other function as agents for the plaintiffs, and any charge on the defendants' chipboard and other property of the defendants must necessarily have been created by the defendants and be void.

In the result, I agree that the appeal must be allowed.

BUCKLEY L.J.

I agree that this appeal should be allowed. We are concerned here with resin sold under the terms of the condition which has been referred to by Bridge L.J. in the course of his judgment, and manufactured into chipboard. Under the terms of that condition the legal property in the resin initially remained in the plaintiffs. I do not find it necessary to pause to consider whether, during the continuance of that state of affairs, the defendants were properly to be regarded as bailees of the resin or not.


It is common ground that it was the common intention of the parties that the defendants should be at liberty to use the resin in the manufacture of chipboard. After they had so used the resin there could, in my opinion, be no property in the resin distinct from the property in the chipboard produced by the process. The manufacture had amalgamated the resin and the other ingredients into a new product by an irreversible process and the resin, as resin, could not be recovered for any purpose; for all practical purposes it had ceased to exist and the ownership in that resin must also have ceased to exist.

The condition does not expressly deal with any property in the chipboard, or create any equitable charge upon the chipboard, produced by the manufacture. If any term is to be implied, that must be a term which is necessary to give the contract business efficacy, but it must also be a term which the court can see unambiguously to be a term which the parties would have inserted into their contract had they thought it appropriate to express it. If no such term can be identified, then the court may have to conclude that the contract was inept to achieve any valuable, practical result in that respect.

Is it possible here to imply any term giving the plaintiffs a proprietary interest in the chipboard manufactured by the defendants, or giving the plaintiffs an equitable charge upon that chipboard?

Common ownership of the chipboard at law is not asserted by the defendants; so the plaintiffs must either have the entire ownership of the chipboard, which is not suggested, or they must have some equitable interest in the chipboard or an equitable charge of some kind upon the chipboard. For my part, I find it quite impossible to spell out of this condition any provision properly to be implied to that effect.


It was impossible for the plaintiffs to reserve any property in the manufactured chipboard, because they never had any property in it; the property in that product originates in the defendants when the chipboard is manufactured. Any interest which the plaintiffs might have had in the chipboard must have arisen either by transfer of ownership or by some constructive trust or equitable charge, and, as I say, I find it impossible to spell out of this condtion anything of that nature.

Mr. Mowbray, in a very valiant argument, has contended that he can achieve his end by relying upon the doctrine of tracing. But in my judgment it is a fundamental feature of the doctrine of tracing that the property to be traced can be identified at every stage of its journey through life, and that it can be identified as property to which a fiduciary obligation still attaches in favour of the person who traces it.

In the present case, in the circumstances that I have described of the resin losing its identity in the chipboard, I find it impossible to hold that the resin can be traced into the chipboard, or to any other form of property into which the chipboard might at any time be converted. Accordingly, it seems to me that the doctrine of tracing is inapplicable to a case such as this.

If it were possible to arrive at the conclusion upon the facts of this case that the plaintiffs acquired an equitable charge of some kind upon the chipboard, I should have thought that the case would fall within section 95 (2) (c), which is the paragraph which relates to a charge "created or evidenced by an instrument which, if executed by an individual, would require registration as a bill of sale." I would not myself have thought that in the circumstances of this case there could be said to be a floating charge, for the charge, if it arises at all, arises when a particular parcel of the plaintiffs' resin is incorporated in a particular batch of the defendants' chipboard, and the charge must then arise either immediately, or possibly in futuro, in respect of that particular batch of chipboard, and I would have thought that it must be a specific charge on that specific parcel of chipboard and not a charge upon the chipboard produced by the defendants from time to time. Consequently, it does not seem to me that it could have the character of a floating charge. But that it would be a charge arising from a contract entered into between the parties, and therefore a charge created by the parties, I would think to be the position if such a charge arises at all, for it is a charge which must flow, and flow exclusively, from the fact that the parties entered into a contract containing this particular condition reserving the property in the resin.

But, for the reasons I gave earlier in my judgment, in my opinion one does not reach section 95 in this case, because the plaintiffs acquired no interest of any kind in the chipboard.

For these reasons I also agree that this appeal should be allowed.Appeal allowed with costs. Leave to appeal refused.




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