Case 7 - Supply of material to manufacturer (I)

Summary

(Retention of title and products clause – property effects of manufacturing)

B is a producer of curtains and other decorative items. A sells 500 rolls of cloth to him. The contract contains the following clause: ‘The seller reserves title to the goods sold under this contract until he has received full payment.’ In the two weeks following delivery, B transforms the cloth into curtains. Of the final value of the curtains, 60 per cent can be attributed to the cloth, the remaining 40 per cent to the manufacturing process. Before the curtains are sold and delivered to B's customers, a bailiff, acting on behalf of an unsecured creditor, C, attempts to execute against B's property, including the curtains.

Questions

1. (a) Who owns the curtains? Does the ratio of the value of the material supplied and the value added by the manufacturing process matter? Does it matter who bears the risk of the manufacturing process, A or B?

2. (b) May the newly produced items be subjected to execution on behalf of C?

3. (c) Could A obtain a better right to the products (for example, by adopting a differently worded clause, or by using a different type of retention of title clause, or through a legal transaction other than pure sale)? What would be the precise prerequisites? Are such arrangements commonly used?

4. (d) Instead of an unsecured creditor attempting to execute against B's property, B goes bankrupt. What are the answers to parts (b) and (c) in that situation?