Prior to the decision of the House of Lords, the law in Scotland on Retention of title clauses had rested on the decisions of Lord Ross in Emerald Stainless Steel Limited -v- Southside Distribution Limited (1983) SLT 162 and Deutz Engines Limited -v- Terex Limited, 1984) SLT 273. In those cases Lord Ross had accepted that only a simple retention of title clause was valid. That is to say, a clause which provided the property in goods supplied did not pass to the purchaser until the price had been paid. If the clause went beyond that and was an "all sums" clause, which provided that property did not pass until all sums due by a purchaser to a supplier were paid, then the clause was invalid. Obviously more elaborate versions of a retention of title clause were also invalid. The reasoning for this was that what was being effected by such a clause was truly an attempt to create a right of security over corporeal movables without transfer of possession, something which was ineffective under Scots Common Law.

It is clear that Lord Ross in Emerald Stainless Steel and Deutz -v- Terex was influenced by the decision of the First Division of the Court of Session in Clark Taylor & Co. Ltd. -v- Quality Site Development (Edinburgh) Limited (1981) SLT 308. That case was the first time that the Court in Scotland had addressed fully the implications of the `Romalpa' case in England (Aluminum Industrie Vaassen BV -v- Romalpa Aluminum Ltd. (1976) 2 ALL ER 552). In the Clark Taylor case, the retention of title clause went much further than an "all sums" clause by attempting to create a trust. The buyer in the terms of the contract was required to hold any rights of resale in trust for the supplier and also hold in trust any money or consideration received by him for the goods. Not surprisingly, the Court decided that was clearly an attempt to create a security over movables without possession. Emerald Stainless Steel and Deutz -v- Terex both came before the Court on hearings for interim interdict. In each case these were "all sums" clauses. Lord Ross was of the view that an "all sums" clause which could include money due under other contracts between the parties and which had nothing to do with the contract in question was truly an attempt to create a security over movables without possession. He therefore concluded that "all sums" clauses were not effective under the law of Scotland.

In Armour & Another -v- Thyssen Edelstahlwerke A.G. the facts were that Thyssen, the German steel manufacturer, supplied steel to Carron Co. Ltd. The relevant condition of contract provided "all goods elivered by us remain our property (goods remaining in our ownership) until all debts owed to us including any balances existing at elevant times- due to us on any legal grounds - are settled. This also holds good if payments are made for the purpose of settlement of specially designated claims. Debts owed to Companies being members of our combine are deemed to be such debts." Shortly after the steel was delivered, Carron went into receivership. Carron's receivers raised an action for declarator to determine the ownership of the steel. Thyssen counterclaimed for payment of the price of the steel, a sum just over ú70,000. The contract provided that West German law applied to the contract.

However as the German lawyers were unable to agree as to what this was, Lord Mayfield applied Scots law as the lex situs governing the ownership of the goods. He concluded, following the decisions of Lord Ross, that the Clause was an attempt to create a right of security over the steel without transfer of possession and that the property in the steel strip passed to Carron on delivery. Thyssen reclaimed and the case came before the Second Division (Lord Justice Clerk Ross, Lord Macdonald and Lord Wylie). The Second Division found in favor of the receivers on substantially the same grounds as had the Lord Ordinary.

Thyssen appealed again to the House of Lords. The House of Lords accepted that it was well settled in Scottish law that a condition in a contract for the sale of movables which provided that, notwithstanding delivery, ownership of the goods would not pass to the buyer, until the price has been paid, was valid and effective. In the principal speech in the House of Lords, Lord Keith examined the elements required in creating a security over movables. He reached the conclusion that Thyssen, the owners of the steel, transferred possession of it to Carron under a contract of sale.

Carron obtained possession of the steel on delivery but subject to a condition that it could not obtain the property in the steel until it had paid all debts due to the appellant. How then did Carron attempt to create a security over the goods in favor of Thyssen? In order that it could, Carron would require to have had both the ownership and the possession actual or constructive of the goods.

Section 17 of the Sale of Goods Act provides that where there is a contract for sale of specific goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred and, for the purpose of ascertaining that intention, regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. The terms of the contract clearly stated the intention that the property in the steel should not pass to Carron until all debts due by Carron to Thyssen had been paid. Lord Keith reached the conclusion that there were no grounds for refusing to giveeffect to that intention. It was argued for the receiver, that, in terms of Section 19(1) of the Sale of Goods Act 1979, by imposing conditions on Carron, Thyssen was attempting to create a security. Lord Keith was of the view that while in a sense it did give Thyssen a security for unpaid debts, it did so by way of a legitimate retention of title not by virtue of any right over property conferred by Carron.

Lord Keith distinguished this from a right of security when the debtor retains an ultimate right over the property in question. If a creditor in a security has to realize the security subjects and he receives a sum more than sufficient to meet the debt, he is obliged to account to the debtor for the surplus. However, in a case where there is retention of title, ownership of the goods does not pass to the purchaser, and if the goods are repossessed there is no bligation on the original seller to account to the purchaser for any part of the value of the goods. Lord Jauncey considered that it was of the essence of a right in security that the debtor possess, in relation to the property, a right which he can transfer to the creditor which might be retransferred to him upon payment of the debt. It followed that the clause did not attempt to create a right of security. What it did do was to transfer possession and dominium in two stages. Until the conditions of the clause were satisfied the dominium remained with Thyssen.

It follows from this analysis that the earlier decisions in both the Outer and Inner Houses of the Court of Session in this case and also Emerald Stainless Steel and Deutz -v- Terex were wrongly decided. Lord Keith specifically stated that the clause in question was valid and effective. While no argument was presented on the "combine" part of the clause which provided "debts owed to Companies being members of our combine are deemed to be such debts" it follows logically that part of the clause is also valid.

The judgment is clearly very significant in commercial terms. Suppliers should be reviewing their conditions of contract to take advantage of the new legal position. "All sums" clauses and "combine" clauses should now become commonplace. Obviously the most likely time when the conditions will be tested are when either a receiver, liquidator or trustee is appointed to a business. Provided the retention of title clause is valid and provided the goods can be identified then the supplier should be entitled to return of his goods. Identification remains a source of considerable problems to both suppliers and insolvency practitioners.

From the other end of the spectrum, banks and other financial institutions who lend money to companies may find that the floating charges over the assets of the company may now not be quite as valuable as they were. A receiver attempting to continue a business may find that his stock has disappeared when the suppliers come and claim their goods back. In addition it may affect the ability of a receiver to effect a sale of a business as a going concern