Romalpa clausea clause in a contract modelled on the clause that was upheld in the English Court of Appeal in the case of that name. There are two main elements:
- (1) retention of title. Because of the rules on passing of property in sale, it is possible for parties to stipulate that property shall not pass until the seller has been paid. The controversial idea was to say that property should not pass until all sums that might be due to the seller have been paid. This could mean that the actual price of the actual goods delivered has been paid but because of an unpaid debt in relation to some other transaction (even a transaction by another company in the same group) the property has not passed. The importance of this commercially is that if the buyer becomes insolvent then the seller has a right to reclaim the property in question and it does not fall into the hands of the creditors. This is frequently much better than simply ranking for a dividend. The concept has now been recognized in the Scots law, which had previously refused to recognize such clauses as constituting security without possession;
- (2) the other main component of the clause involves a trust provision. This is to cover the situation where the buyer uses the goods and sells them on. Because of the retention, the property the buyer used to sell on was truly that of the seller and the trust provision seeks to make the buyer hold the money on trust for the seller. Because of the TANTUM ET TALE rule, should the buyer become insolvent the sums so collected have to be accounted for to the seller and do not form part of the insolvent estate.
Collins Dictionary of Law © W.J. Stewart, 2006