- 19 December 2017
- Posted by: Elaine McGrath
- Categories: Commercial Law, Insolvency
How well does your retention of title clause protect you?
1. What is a Retention of Title Clause (‘RoT’)?
The purpose of a RoT is to protect the supplier of goods in the event of insolvency of the purchaser. It is a contractual clause whereby the supplier retains title to the goods until they have been paid for by the purchaser. Accordingly, the unpaid goods do not form part of the general pool of assets to be realised on insolvency proceedings.
In theory a RoT entitles the supplier to retake possession of the unpaid goods. However, beware, to be enforceable your RoT must be properly drafted and incorporated into the contract with your customer.
Without a RoT it is likely you will rank with other unsecured creditors in the insolvency proceedings and as such are unlikely to get all, if indeed any, of the monies you are owed.
2. Important points to consider when drafting or seeking to enforce a
2.1. Has the retention of title clause been properly incorporated into the
It should not be assumed that the purchaser is aware of the RoT. The burden of proof is on the supplier to show that it brought the RoT to the attention of the purchaser and that it was understood and accepted by the purchaser. Accordingly it is important to ensure that the RoT is clearly set out in your terms and conditions of sale , which in turn are brought to the attention of your customer. If possible, you should seek formal acceptance from your customer of your terms and conditions for example by getting them to sign a credit agreement.
A recent UK case demonstrates that the fact that your terms and conditions and RoT are included on your documentation may not be sufficient evidence that the RoT was properly incorporated. In the case of P4 Limited -v- Unite Integrated Solutions PLC a supplier unsuccessfully sought to enforce its RoT. The supplier claimed that its terms and conditions of sale were printed on the back of the initial quote supplied to the customer. The Court was not satisfied that this was in fact the case. The Court also found that even where the terms and conditions had appeared on the reverse of the initial quotation, subsequent correspondence, during which an actual order was placed, did not make any reference to the supplier’s conditions. As such there was no link between the terms and conditions that may have been printed on the initial quotation and the actual order that was placed. Accordingly it was held that the RoT clause was not validly incorporated into the contract.
This demonstrates that the customer will not be bound by your RoT unless it has clearly been brought to his attention and incorporated correctly in the actual contract.
2.2. Is simply retaining title enough?
A simple retention of title clause will provide that title to the goods will not pass to the purchaser until they have been paid for in full. Without certain supplemental provisions a simple RoT may not be sufficient to retake possession of your goods.
The RoT should include the right of the supplier to enter on the premises of the purchaser for the purposes of repossessing the goods. There may also be included an obligation for the buyer to store the seller’s goods separately, to mark them as the seller’s property and to insure them.
3. Problems which may render your RoT ineffective
There are a number of circumstances which may render your RoT ineffective unless supported by relevant additional provisions.
3.1. The goods are no longer identifiable
Goods may no longer be identifiable where they have been used and as a result lose their original identity, for example in a manufacturing process. Once the goods have become unidentifiable through some sort of manufacturing process the RoT will no longer be effective. You may want to include a provision that the goods may not be used in any such process without your prior consent.
3.2. The goods are identifiable but irretrievable
Where the goods such as building materials have become part of the property, they may be identifiable but irretrievable. Accordingly, dependent on the type of goods being supplied it may be advisable to include a provision whereby the purchaser is not entitled to so attach the goods without the seller’s prior consent.
3.3. The goods are not attributable to a particular invoice
Where there is a continual supply of similar goods to a purchaser it may be difficult to attribute particular goods to a particular invoice. Therefore an ‘all monies’ form of clause would be advisable. This provides that title to the goods will not pass until such time as all monies owed to the supplier have been discharged.
3.4. The goods have been sold on to a third party
Where the goods have been sold to a third party who bought in good faith and without notice of the RoT it may be difficult to enforce the clause. A supplementary provision, providing that the proceeds for sale are to be held on trust for the seller, may be included. However, there is a difficulty with such as clause as it is unclear whether it may constitute a charge over the sales proceeds which would require registration. The general consensus is that, unless registered, such a proceeds of sales clause would be unenforceable. It should be noted however that such registration would only be required in the case of a company and not an individual.
4.1. It is important that you have a carefully drafted RoT, which takes account of the nature of the goods being supplied and the relationship between the parties.
4.2. Ensure that the RoT is properly incorporated into the contract with the purchaser by ensuring that the purchaser is aware of the clause and has accepted it, for example by requiring the purchaser to sign up to a credit agreement at the outset of the relationship or ensuring that all correspondence reiterates and confirms that all goods supplied are subject to the RoT.
4.3. If your customer is in financial difficulty, act quickly to recover your goods.
4.4. If the customer does go into liquidation, receivership or examiner, notify the liquidator, receiver or examiner as soon as possible, identifying the goods in question.
4.5. If you have followed the proper procedures in incorporating the RoT clause, if it is drafted properly and you can identify the goods, you will at least be able to salvage something form the collapse of your customer.
For further information please contact Elaine McGrath — firstname.lastname@example.org
This information is for guidance purposes only. It does not constitute legal or professional advice. Professional or legal advice should be obtained before taking or refraining from any action as a result of the contents of this publication. No liability is accepted by Reddy Charlton for any action taken in reliance on the information contained herein. Any and all information is subject to change.