Are you utilising retention of title clauses?
They say business is built on trust, and in many ways, that’s true. After all, customers are likely to be loyal to a trusted brand, and suppliers often give more favourable terms to customers who have proven to be trustworthy in the past. But in reality, a person's word can only go so far. Supplying goods and services without a contract in place is risky, and even if you have a contract in place, overlooking the details can prove costly.
Whether you are a large-scale supplier of widgets or a family-run business supplying building materials, it's unlikely that you're regularly asking for payment upfront before handing over the goods. You’ll have payment terms in place, usually 30 days, to allow the customer to pay you what they owe – kind of like buy now, pay later but on a larger scale. But what happens if they don’t? Where do you stand if the customer doesn’t pay or can’t pay due to insolvency?
That’s where Retention of Title (ROT) clauses become important.
What are Retention of Title (ROT) clauses?
Put simply, it’s a clause in a contract that states the ownership of goods remains with the seller until a specific event, usually payment in full, takes place. This means when you deal with a buyer who subsequently fails to pay what is owed under a supply contract, you’re protected and can seize the goods and resell them.
ROT clauses can be particularly useful in relation to an insolvent customer; since June 2020, suppliers of goods have been unable to terminate their supply contract when their customer becomes insolvent, even if the contract states that they are allowed to. Therefore, the ability to recover possession of any goods that have not been paid for can be a very useful loss mitigation tool.
What would you expect to see?
The most common form used by suppliers is known as an ‘all sums’ clause. Under an ‘all sums’ clause, the supplier retains ownership of the goods delivered to the buyer until all debts under all/any contracts have been paid and any other obligations have been met by the purchaser according to the contract.
Another form is a “tracing” or “proceeds of sale” clause. Here, the supplier seeks to retain ownership of the goods delivered until the full purchase price for those goods under the contract has been paid. If a buyer sells the goods on, the supplier may acquire ownership of the proceeds of sale or debts owed by the sub-buyer(s).
The simplest form of an ROT Clause notes that legal ownership in the goods shall not pass to the buyer until the goods under the specific contract have been paid for in full.
Limitations
ROT clauses would not be appropriate for perishable goods and can be difficult to enforce when you are dealing with items that are to be incorporated into a new product, such that it’s not possible to separate your supplied item from the new creation.
Validity of a clause is the main stumbling block to the success of any enforceability. Many suppliers work on a “last shot fired” form of contract negotiations, with each party looking to incorporate their own standard terms via the purchase order, delivery note, invoices, etc. Therefore, it is important that goods are specifically documented, the ‘type’ is sufficiently identifiable, and these are incorporated into the contract in accordance with legal formalities.
Insolvency
You cannot terminate an agreement on the grounds of a buyer’s insolvency (without the permission of the court or the consent of the insolvency practitioner), but as noted above, the ROT Clause can be used to mitigate loss.
A supplier’s claim under a ROT clause to any unused goods will be valid against any subsequently appointed liquidator or trustee, provided the clause has been incorporated into the contract (section 25(1) of the Sale of Goods Act 1979).
Importantly, goods which are held to be subject to a ROT clause fall outside the scope of any insolvency proceedings, and you will not be treated as an unsecured creditor for your debt (to the extent that it can be met from the recovery of the goods – you would remain entitled to prove in the insolvency for any surplus). This is because the ROT Clause operates so that until payment is received, you remain the legal owner of the goods. Once in possession, you can deal with the assets as you wish to recoup the unpaid sum.
On notification of an insolvency event of a buyer, you will need to notify the insolvency practitioner dealing with the insolvency of your right to the goods. The burden is on you to prove your claim, so evidence will need to be produced to show that you have a fiduciary relationship with the buyer.
Summary
ROT Clauses can become complex, especially when dealing with large-scale supply contracts. Care needs to be taken to ensure that the clause is effective both legally and from a practical perspective.
Ineffectively drafted clauses may inevitably leave you as an unsecured creditor for the debts owed and leave you with a fraction of what was owed, more specifically, without reclaiming the goods.
Contact
If you would like further information in relation to retention of title, please contact Sarah Farish at [email protected] or 0191 211 7898 for further details.