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The facts

In the given question, carpet manufacturer and wholesaler�Quality Carpets (Carpets, as will be indicated in later discussion for abbreviation) ordered 10,000 lineal meters of “textureweave” from Cotton and Flax Pty Ltd (Cotton) under certain contract terms. Carpets used “textureweave” to manufacture its own carpets, and sold it to carpet retailers throughout Australia and New Zealand. After the order of “textureweave” arrived on Monday 8, July, Carpets sequentially mixed it to produce carpet during the next few days. Since Carpets started fall into voluntary liquidation on 1st August, Cotton and Flax was raising legal concerns with all unpaid “textureweave” from Carpets.

Under the contract of sale which involves certain Clause as following

“Property in the goods sold will not pass to the buyer until

Cheap College Papers on Quality Carpets v Cotton and Flax Pty Ltd

[a] The purchase price has been paid in full;

[b] The purchase price has been paid in full and the buyer has paid all other debts owed to seller;

[c] If the goods are resold by the buyer before the seller has been paid, the entitlement of the seller will attach to the proceeds of resale or the debt owed to the buyer by the third party on resale;

[d] IF payment becomes overdue, and it is deem due if there is any act of insolvency by the buyer, the seller may recover and resell the goods; and

[e] If the goods, before payment, are incorporated in or used as material for other goods, the property in those other goods will vest in the seller, and his entitlement will attach to the proceeds of sale thereof and the debt due to the buyer on such sale, but only for so long as the seller’s debt is unpaid”

The issues

Whether Cotton can

• Go to Carpets plant and take back the unused portion of “textureweave”

And/ Or

• Seize that amount of Carpets which was made using the rest of the “textureweave”.

Legal Precedent--- “Romalpa Clause”

The identical circumstance encountered in the Carpets v Cotton case is remained in the famous Romalpa Case, which is the dispute between Aluminum Industry Vaassen BV and Romalpa Aluminum Ltd

The plantiffs sold foil to the defendants, under certain contract. Later on, the defendants got into serious financial difficulties and went into receivership. The plaintiffs claimed that they were entitled to the amount of money that was the proceeds from selling to third parties in priority to the secured and unsecured creditors.

In their contract, it is provided that the ownership of the material to be delivered by the plaintiffs will only be transferred to the defendants when they have met all that is owing to the plaintiffs. And, if the foil had been mixed with other material by the defendants for the purpose of creating new ‘objects’, the ownership of any such objects was to be transferred to the plaintiffs as ‘ surety’ for ‘ full payment’ and until full payment had been made the defendants were to keep the mixed goods for the plaintiffs as ‘fiduciary owner’.

Therefore, it is quite obvious that the foil that had been delivered to the defendant still belongs to the plaintiff, as the defendant hadn’t made a full payment until their receivership. And, it was held that, those amounts of money, which was the proceeds from sale of goods manufactured with the foil, should be entitled to the plaintiffs in this case.

This is right the case where Romalpa clause came from. The purpose of the Romalpa clause is to protect the seller from the insolvency of the buyer where the price remains unpaid and to defeat the claims of other creditors with registered charges who would otherwise take priority over the interest of the seller.

The basic format of the clause is a stipulation in the conditions of sale that the property in the goods sold to the buyer and of which he or she is allowed to take possession will not pass to the buyer until either the purchase price has been fully paid or all other debts not just purchase price owing by the buyer to the seller has been fully paid. This stipulation is usually extended as

(a) If the buyer incorporates the goods in some other product, the title to the end-product will not pass to the buyer until either the purchase price of the goods or the total indebtedness of the buyer to the seller is fully paid up.

(b) If the buyer resells the goods to a sub-purchaser during ordinary business, the proceeds of such resale or the debt due to the buyer from the sub-purchaser are held by the buyer on behalf of the seller.

However, the Romalpa clause was derived from a multi-national background (English & Holland), we cannot suggest Cotton, the plaintiff in our case, explicitly based on Romalpa clause. We have to go over the interpretation of Romalpa clause in the background of Australian legal system

Firstly, if the goods are still in the possession of the buyer and have not been resold or incorporated in other products or altered in any way but remain identifiable, effect will be given to the clause. Secondly, if the goods have been used in the manufacture of a new product, then, if they have been so consumed so that they no longer exist, or if they have been incorporated in the new product even though still identifiable, the clause cannot be invoked on the seller’s behalf to enable her or him to recover the goods. The seller is only entitled to a charge on the new product and any provision purporting to confer ownership of the new goods on the seller will be ineffective.

Therefore, as far as the Carpets v Cotton case is concerned, Cotton could definitely take back the “textureweave” that hadn’t been used yet, under both the contract term [c] and the implication of the first part of Romalpa clause.

For those amounts of carpet which was made using the rest of the “textureweave”, it seems that under the contract term [e], Cotton could take those amounts of carpet back as well in the first sight. However, under the propositions of Romalpa clause established by authorities, which would be applicable in Australia, Cotton could not attempt to be entitled to the carpets. Since it is very possible for Carpets to have borne the cost of manufacture of the new product and may have provided other materials for incorporation in the new goods, whether the “textureweave” was identifiable or not, the clause cannot be invoked on the Cotton’s behalf to enable them to recover the goods, although there is no doubt that the carpets were made from the “textureweave” they provided to Carpets. The parties cannot intend on the determination of the contract simply because of the buyer’s breach, the seller should gain the windfall of the full value of the new product. Therefore, Cotton was only entitled to a charge on the carpets, but not all of the carpets.

The assumptions

As we just mentioned, Cotton could not seize that amount of carpets, what if some amount of the carpets that were made using “ textureweave” provided by Cotton had been sold to the third parties?

Assumption 1 Proceeds of Resale

Since Quality Carpets (Buyer) voluntarily liquidated on Friday 1 August right after the arrival of order of “ textureweave” on Monday 8 July, assumptions come with the regarding to the Carpets’ resold and unsold products which was made using rest of “textureweave” from Cotton.

• Contract Law (1-185) Romalpa Clause

According to the Romalpa Clause illustrated under the Contract of Sale between Quality carpets (Buyer) and Cotton Flax (Seller). The creditable remedies of proceeds of resale without reasonable payment will be demonstrated as below. Applied to Contract term [c], this clause does not impact on the ordinary course of buyer’s business. However, seller owns the equity of all moneys including profits received by the buyer through these goods resale. Meanwhile, this amount should be directly paid into an individual bank account trusted by seller. It means the proportion of money is not available for use by buyer except to make payment to seller; whereas, if the sum exceeds the amount owed to the seller, it is obviously the seller has not right to keep the excess part. It shows that the situation is only involving a mortgage or charge (it will be demonstrate in corporations law part).

Furthermore, possibly, seller has not only the right to claim for belonging goods, but also the right to claim any other goods which have been made with the goods sold. These proceeds will bring additional benefit to seller from buyer.

These can be inferred from cases 1) Borden (UK) ltd v Scottish Timber Products Ltd. The seller of resin is not legally offered the right to claim for the other goods that have been made with this material. However, ) Re Peachdart Ltd stands for that the leather’s owner can claim for the other goods. Overall, the transferred claims to other goods are account for the nature of the factual materials. Another point here is the repair contract won’t be held by the law to make claims of goods possession.

• Corporation Law

Within the definition of sec. of the corporations law, the clause [c] and [e] are not sufficient to approval the charge between these two parties, so the detailed provision cannot govern actions of seller and also no obligation for seller to submit “registrable charge” under Section 6.

Assumption Bailment relationship

Regarding to determine the equitable rights, liabilities and obligations of the two parties arise from the operation of the claims to the proceeds of resale. It can be assumed that the relationship between Cotton and Flax and Quality Carpets involves a bailment.

Under this assumption, if the bailee sells the goods bailed, the bailor can in equity follow the proceeds, and can follow the proceeds where they can be distinguished either being actually kept separate, or being mixed up with other moneys. Quality Carpets has resold the goods that involved a sale of the seller’s goods, and therefore Cotton and Flax is entitled the right to claim the profit, the proceeds belonging in equity to the sellers.

The arguments arise in the following aspects.

Firstly, in the present case, the fact is that the seller may in some circumstances (the payment has not been made by the buyer on the due date) be entitled to reclaim the goods delivered to the buyer. This transaction does not make the bailment exist.

Secondly, a bailment involves that there may be some circumstances in which the bailee is obliged to redeliver the very same goods to the bailor. The used textureweave will never be redelivered to the seller; therefore the transaction simply cannot be a bailment.

Thirdly, as mentioned above, the seller is entitled the proceeds of resale. It is unlikely that the Cotton and Flax intended the whole of the proceeds of sale. The seller just draft the clause to give him some security even after the goods has been resold.

It is clear from the points above that the relationship between the two parties is creditors and debitors, and any attempt by the seller to claim title over the proceeds of resale will be a charge or mortgage requiring registration.


Whilst in our judgement, based on implication of retention or reservation of title clause in contract and certain provisions adopted under Contract law, Cotton is wholly entitled to all the unused portion of the “textureweave” prior to other creditors. However, regarding to mixed and used part of this material, Cotton is only entitle to charge carpets which can only limited to the amount of its selling to Carpets not the whole set of carpets. It has also to be stressed that under different circumstances, seller (Cotton) has slight different provisions to guide for enforcing their entitlements such as sold and unsold carpets that we have mentioned in our assumptions.


1. Paul Latimer, (00), Australian Business Law, CHH Australia

Limited, p81

. Gaudron, Mchugh, Gummow, Kirby, Hayne JJ; The Associated

Alloys Case, [000] HCA 5 (11 May)

. Megaw, Roskill and Goff JJ, Aluminium Industries Vaassen BV v

Romalpa Aluminium Ltd. [176] All ER

4.Australian Corporations Legislation 00, Butterworths, Reed

International Books Australian Pty Limited, p.10

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